UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2021

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________to_______

COMMISSION FILE NUMBER 001-33164

DOMTAR CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	20-5901152
(State of Incorporation)	(I.R.S. Employer Identification No.)

234 Kingsley Park Drive, Fort Mill, SC 29715

(Address of principal executive offices)

(zip code)

(803) 802-7500

(Registrant’s telephone number)

Securities registered pursuant to Section 12(b) of the Act: Common Stock, Par Value $0.01 Per Share; Common stock traded on the New York Stock Exchange; trading symbol UFS.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    NO  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation ST (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    NO  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Small reporting company	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ☐    NO  ☒

At October 31, 2021, 50,379,090 shares of the issuer’s common stock were outstanding.

DOMTAR CORPORATION

FORM 10-Q

For the Quarterly Period Ended September 30, 2021

INDEX

PART I.	FINANCIAL INFORMATION	3
ITEM 1.	FINANCIAL STATEMENTS (UNAUDITED)	3
	CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) AND COMPREHENSIVE INCOME (LOSS)	3
	CONSOLIDATED BALANCE SHEETS	5
	CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY	6
	CONSOLIDATED STATEMENTS OF CASH FLOWS	8
	INDEX FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	9
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	10
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	49
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	61
ITEM 4.	CONTROLS AND PROCEDURES	61
PART II	OTHER INFORMATION	61
ITEM 1.	LEGAL PROCEEDINGS	61
ITEM 1A.	RISK FACTORS	61
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	63
ITEM 3.	DEFAULT UPON SENIOR SECURITIES	63
ITEM 4.	MINE SAFETY DISCLOSURES	63
ITEM 5.	OTHER INFORMATION	63
ITEM 6.	EXHIBITS	64

PART I: FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS (UNAUDITED)

DOMTAR CORPORATION

CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) AND COMPREHENSIVE INCOME (LOSS)

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

	For the three months ended						For the nine months ended
	September 30,			September 30,			September 30,			September 30,
	2021			2020			2021			2020
	(Unaudited)
	$			$			$			$
Sales		1,031			899			2,985			2,732
Operating expenses
Cost of sales, excluding depreciation and amortization		802			750			2,400			2,349
Depreciation and amortization		53			56			160			170
Selling, general and administrative		70			66			202			193
Impairment of long-lived assets (NOTE 12)		1			111			8			111
Closure and restructuring costs (NOTE 12)		5			68			33			69
Asset conversion costs (NOTE 12)		9			—			22			—
Other operating income, net (NOTE 8)		(5	)		—			(6	)		(3	)
		935			1,051			2,819			2,889
Operating income (loss)		96			(152	)		166			(157	)
Interest expense, net		7			14			42			43
Non-service components of net periodic benefit cost (NOTE 7)		(7	)		(4	)		(19	)		(13	)
Earnings (loss) before income taxes and equity loss		96			(162	)		143			(187	)
Income tax expense (benefit) (NOTE 9)		22			(52	)		38			(60	)
Equity method investment loss, net of taxes		—			1			—			2
Earnings (loss) from continuing operations		74			(111	)		105			(129	)
Earnings (loss) from discontinued operations,    net of taxes (NOTE 3)		—			19			(23	)		61
Net earnings (loss)		74			(92	)		82			(68	)
Per common share (in dollars) (NOTE 6)
Basic net earnings (loss)
Earnings (loss) from continuing operations		1.47			(2.01	)		2.04			(2.33	)
Earnings (loss) from discontinued operations		—			0.34			(0.44	)		1.10
Basic net earnings (loss)		1.47			(1.67	)		1.60			(1.23	)
Diluted net earnings (loss)
Earnings (loss) from continuing operations		1.46			(2.01	)		2.03			(2.33	)
Earnings (loss) from discontinued operations		—			0.34			(0.44	)		1.10
Diluted net earnings (loss)		1.46			(1.67	)		1.59			(1.23	)
Weighted average number of common shares    outstanding (millions)
Basic		50.4			55.2			51.4			55.5
Diluted		50.7			55.2			51.6			55.5
Cash dividends per common share		—			—			—			0.91

3

DOMTAR CORPORATION

CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) AND COMPREHENSIVE INCOME (LOSS)

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

	For the three months ended						For the nine months ended
	September 30,			September 30,			September 30,			September 30,
	2021			2020			2021			2020
	(Unaudited)
	$			$			$			$
Net earnings (loss)		74			(92	)		82			(68	)
Other comprehensive (loss) income (NOTE 14):
Net derivative gains (losses) on cash flow hedges:
Net gains arising during the period,    net of tax of nil and $(8), respectively    (2020 – $(7) and nil, respectively)		—			20			27			—
Less: Reclassification adjustment for (gains) losses    included in net earnings (loss), net of tax of $3 and $5,    respectively (2020 – $(1) and $(5), respectively)		(11	)		1			(25	)		14
Foreign currency translation adjustments		(21	)		40			63			5
Change in unrecognized gains (losses) and prior service cost    related to pension and post-retirement benefit plans, net of tax of    $(3) and $(11), respectively (2020 – $12 and $11, respectively)		12			(38	)		37			(35	)
Other comprehensive (loss) income		(20	)		23			102			(16	)
Comprehensive income (loss)		54			(69	)		184			(84	)

The accompanying notes are an integral part of the consolidated financial statements.

4

DOMTAR CORPORATION

CONSOLIDATED BALANCE SHEETS

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

	At
	September 30,			December 31,
	2021			2020
	(Unaudited)
	$			$
Assets
Current assets
Cash and cash equivalents		344			309
Receivables, less allowances of $4 and $6		556			380
Inventories (NOTE 10)		644			630
Prepaid expenses		69			50
Income and other taxes receivable		30			54
Current assets held for sale (NOTE 3)		—			1,133
Total current assets		1,643			2,556
Property, plant and equipment, net		2,034			2,023
Operating lease right-of-use assets (NOTE 11)		45			59
Intangible assets, net		29			29
Other assets		196			189
Total assets		3,947			4,856
Liabilities and shareholders' equity
Current liabilities
Trade and other payables		553			484
Income and other taxes payable		18			15
Operating lease liabilities due within one year (NOTE 11)		19			20
Long-term debt due within one year		1			13
Current liabilities held for sale (NOTE 3)		—			295
Total current liabilities		591			827
Long-term debt		503			1,084
Operating lease liabilities (NOTE 11)		40			50
Deferred income taxes and other		325			321
Other liabilities and deferred credits		273			314
Commitments and contingencies (NOTE 16)
Shareholders' equity (NOTE 15)
Common stock $0.01 par value; authorized 2,000,000,000 shares;    issued 65,001,104 and 65,001,104 shares		1			1
Treasury stock $0.01 par value; 14,623,037 and 9,806,566 shares		—			—
Additional paid-in capital		1,488			1,717
Retained earnings		928			846
Accumulated other comprehensive loss		(202	)		(304	)
Total shareholders' equity		2,215			2,260
Total liabilities and shareholders' equity		3,947			4,856

The accompanying notes are an integral part of the consolidated financial statements.

5

DOMTAR CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

	For the three months ended
	September 30, 2021
	Issued and outstanding common shares (millions of shares)		Common stock, at par		Additional paid-in capital			Retained earnings		Accumulated other comprehensive loss			Total shareholders' equity
	(Unaudited)
			$		$			$		$			$
Balance at June 30, 2021		50.4		1		1,500			854		(182	)		2,173
Stock-based compensation, net of tax		—		—		3			—		—			3
Net earnings		—		—		—			74		—			74
Net derivative losses on cash flow hedges:
Net gains arising during the period,    net of tax of nil		—		—		—			—		—			—
Less: Reclassification adjustment for gains    included in net earnings, net of tax of $3		—		—		—			—		(11	)		(11	)
Foreign currency translation adjustments		—		—		—			—		(21	)		(21	)
Change in unrecognized gains and prior service cost    related to pension and post-retirement benefit    plans, net of tax of $(3)		—		—		—			—		12			12
Stock repurchase		—		—		(15	)		—		—			(15	)
Balance at September 30, 2021		50.4		1		1,488			928		(202	)		2,215

	For the nine months ended
	September 30, 2021
	Issued and outstanding common shares (millions of shares)			Common stock, at par		Additional paid-in capital			Retained earnings		Accumulated other comprehensive loss			Total shareholders' equity
	(Unaudited)
				$		$			$		$			$
Balance at December 31, 2020		55.2			1		1,717			846		(304	)		2,260
Stock-based compensation, net of tax		0.3			—		9			—		—			9
Net earnings		—			—		—			82		—			82
Net derivative gains on cash flow hedges:
Net gains arising during the period,    net of tax of $(8)		—			—		—			—		27			27
Less: Reclassification adjustment for gains    included in net earnings, net of tax of $5		—			—		—			—		(25	)		(25	)
Foreign currency translation adjustments		—			—		—			—		63			63
Change in unrecognized gains and prior service cost    related to pension and post-retirement benefit    plans, net of tax of $(11)		—			—		—			—		37			37
Stock repurchase		(5.1	)		—		(238	)		—		—			(238	)
Balance at September 30, 2021		50.4			1		1,488			928		(202	)		2,215

The accompanying notes are an integral part of the consolidated financial statements.

6

DOMTAR CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

	For the three months ended
	September 30, 2020
	Issued and outstanding common shares (millions of shares)		Common stock, at par		Additional paid-in capital		Retained earnings			Accumulated other comprehensive loss			Total shareholders' equity
	(Unaudited)
			$		$		$			$			$
Balance at June 30, 2020		55.2		1		1,711		997			(432	)		2,277
Stock-based compensation, net of tax		—		—		3		—			—			3
Net loss		—		—		—		(92	)		—			(92	)
Net derivative gains on cash flow hedges:
Net gains arising during the period,    net of tax of $(7)		—		—		—		—			20			20
Less: Reclassification adjustment for losses    included in net loss, net of tax of $(1)		—		—		—		—			1			1
Foreign currency translation adjustments		—		—		—		—			40			40
Change in unrecognized losses and prior service cost    related to pension and post-retirement benefit    plans, net of tax of $12		—		—		—		—			(38	)		(38	)
Balance at September 30, 2020		55.2		1		1,714		905			(409	)		2,211

	For the nine months ended
	September 30, 2020
	Issued and outstanding common shares (millions of shares)			Common stock, at par		Additional paid-in capital			Retained earnings			Accumulated other comprehensive loss			Total shareholders' equity
	(Unaudited)
				$		$			$			$			$
Balance at December 31, 2019		56.9			1		1,770			998			(393	)		2,376
Stock-based compensation, net of tax		0.1			—		3			—			—			3
Net loss		—			—		—			(68	)		—			(68	)
Net derivative gains on cash flow hedges:
Less: Reclassification adjustment for losses    included in net loss, net of tax of $(5)		—			—		—			—			14			14
Foreign currency translation adjustments		—			—		—			—			5			5
Change in unrecognized losses and prior service cost    related to pension and post-retirement benefit    plans, net of tax of $11		—			—		—			—			(35	)		(35	)
Stock repurchase		(1.8	)		—		(59	)		—			—			(59	)
Cash dividends declared		—			—		—			(25	)		—			(25	)
Balance at September 30, 2020		55.2			1		1,714			905			(409	)		2,211

The accompanying notes are an integral part of the consolidated financial statements.

7

DOMTAR CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN MILLIONS OF DOLLARS)

	For the nine months ended
	September 30, 2021			September 30, 2020
	(Unaudited)
	$			$
Operating activities
Net earnings (loss)		82			(68	)
Adjustments to reconcile net earnings (loss) to cash flows from operating activities
Depreciation and amortization		170			214
Deferred income taxes and tax uncertainties (NOTE 9)		(10	)		(60	)
Impairment of long-lived assets (NOTE 12)		8			111
Net gains on disposals of property, plant and equipment		(3	)		—
Net loss on disposition of discontinued operations (NOTE 3)		33			—
Stock-based compensation expense		6			5
Equity method investment loss, net		—			2
Make-whole premium on repayment of long-term debt		11			—
Other		6			—
Changes in assets and liabilities, excluding the effect of acquisition and sale of business
Receivables		(175	)		38
Inventories		(15	)		30
Prepaid expenses		10			9
Trade and other payables		45			(21	)
Income and other taxes		25			34
Difference between employer pension and other post-retirement    contributions and pension and other post-retirement expense		(13	)		(6	)
Other assets and other liabilities		(11	)		(12	)
Cash flows from operating activities		169			276
Investing activities
Additions to property, plant and equipment		(191	)		(130	)
Proceeds from disposals of property, plant and equipment		4			—
Proceeds from sale of business, net of cash disposed (NOTE 3)		897			—
Acquisition of business, net of cash acquired		—			(30	)
Cash flows provided from (used for) investing activities		710			(160	)
Financing activities
Dividend payments		—			(51	)
Stock repurchase		(238	)		(59	)
Net change in bank indebtedness		—			(10	)
Change in revolving credit facility		—			(80	)
Proceeds from receivables securitization facility		—			25
Repayments of receivables securitization facility		—			(80	)
Issuance of long-term debt		—			300
Repayments of long-term debt, including make-whole premium		(606	)		(3	)
Other		—			(3	)
Cash flows (used for) provided from financing activities		(844	)		39
Net increase in cash and cash equivalents		35			155
Impact of foreign exchange on cash		—			2
Cash and cash equivalents at beginning of period		309			61
Cash and cash equivalents at end of period		344			218
Supplemental cash flow information
Net cash payments (refund) for:
Interest (including $11 million of make-whole premium in 2021)		53			44
Income taxes		18			(25	)

The accompanying notes are an integral part of the consolidated financial statements.

8

INDEX FOR NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1	BASIS OF PRESENTATION	10
NOTE 2	RECENT ACCOUNTING PRONOUNCEMENTS	11
NOTE 3	DISCONTINUED OPERATIONS	12
NOTE 4	ACQUISITION OF BUSINESS	15
NOTE 5	DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT	16
NOTE 6	EARNINGS (LOSS) PER COMMON SHARE	21
NOTE 7	PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS	22
NOTE 8	OTHER OPERATING INCOME, NET	24
NOTE 9	INCOME TAXES	25
NOTE 10	INVENTORIES	26
NOTE 11	LEASES	27
NOTE 12	CLOSURE AND RESTRUCTURING COSTS AND IMPAIRMENT OF LONG-LIVED ASSETS	30
NOTE 13	LONG-TERM DEBT	32
NOTE 14	CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY COMPONENT	33
NOTE 15	SHAREHOLDERS’ EQUITY	36
NOTE 16	COMMITMENTS AND CONTINGENCIES	37
NOTE 17	SEGMENT DISCLOSURES	40
NOTE 18	SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION	41

9

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 1.

_________________

BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, in the opinion of Management, include all adjustments that are necessary for the fair statement of Domtar Corporation’s (“the Company”) financial position, results of operations, and cash flows for the interim periods presented. Results for the first nine months of the year may not necessarily be indicative of full-year results. It is suggested that these consolidated financial statements be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Domtar Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as filed with the Securities and Exchange Commission. The December 31, 2020 Consolidated Balance Sheet, presented for comparative purposes in this interim report, was derived from audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

10

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 2.

_________________

RECENT ACCOUNTING PRONOUNCEMENTS

FUTURE ACCOUNTING CHANGES

TRANSITION AWAY FROM INTERBANK OFFERED RATES

On March 12, 2020, the FASB issued ASU 2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting”. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued.

The amendments in the ASU are elective and apply to entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. An entity may elect to apply the amendments prospectively through December 31, 2022.

The Company does not expect the adoption of this guidance to have a material impact on the consolidated financial statements.

11

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 3.

DISCONTINUED OPERATIONS

Sale of Personal Care business

On March 1, 2021, Domtar completed the previously announced sale of the Company’s Personal Care business to American Industrial Partners (“AIP”) for a purchase price of $920 million in cash, including elements of working capital of $130 million. Domtar received a net amount of $897 million, which represents the selling price minus the settlements of the net indebtedness and other elements of working capital adjustments. In connection with the sale, the Company entered into Transition Services Agreements with AIP pursuant to which the Company agreed to provide various back-office and information technology support until the business is fully separated from Domtar.

The results of operations of the Company’s Personal Care business were reclassified to discontinued operations. These results have been summarized in Earnings (loss) from discontinued operations, net of taxes on the Company’s Consolidated Statements of Earnings (Loss) and Comprehensive Income (Loss) for each period presented. The Consolidated Statements of Cash Flows were not reclassified to reflect discontinued operations. Personal Care was previously disclosed as a separate reportable business segment.

Major components of earnings (loss) from discontinued operations:

	For the three months ended					For the nine months ended
	September 30,		September 30,			September 30,			September 30,
	2021		2020			2021			2020
	$		$			$			$
Sales		—		243			154			738
Operating expenses
Cost of sales, excluding depreciation and amortization		—		179			111			538
Depreciation and amortization		—		15			10			44
Selling, general and administrative		—		33			24			101
Closure and restructuring costs		—		—			1			—
Other operating loss, net		—		—			1			1
		—		227			147			684
Operating income		—		16			7			54
Net loss on disposition of discontinued operations		—		—			(33	)		—
Earnings (loss) from discontinued operations before    income taxes		—		16			(26	)		54
Income tax benefit		—		(3	)		(3	)		(7	)
Net earnings (loss) from discontinued operations		—		19			(23	)		61

12

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 3 – DISCONTINUED OPERATIONS (CONTINUED)

Major classes of assets and liabilities classified as held for sale in the accompanying Balance Sheets were as follows:

	At
	December 31,
	2020
	$
Assets
Receivables		110
Inventories		138
Prepaid expenses		3
Income and other taxes receivable		3
Property, plant and equipment, net		351
Operating lease right-of-use assets		15
Intangible assets, net (2)(3)		554
Other assets		2
Total assets		1,176
Loss on classification as held for sale		(43	)
Total assets of the disposal group classified as held for sale on the Consolidated Balance Sheets (1)		1,133
Liabilities
Trade and other payables		128
Income and other taxes payable		12
Operating lease liabilities due within one year		8
Long-term debt		1
Operating lease liabilities		8
Deferred income taxes and other		130
Other liabilities and deferred credits		8
Total liabilities of the disposal group classified as held for sale on the Consolidated Balance Sheets (1)		295

⁽¹⁾ Total assets and liabilities of discontinued operations are classified in current assets and liabilities, respectively, in the Company’s Consolidated Balance Sheet at December 31, 2020.

⁽²⁾ Intangible assets, net at December 31, 2020 are comprised of $290 million of indefinite-lived assets and $264 million of definite-lived assets.

⁽³⁾ Indefinite-lived intangible assets of the disposal group held for sale consists of trade names ($248 million) and catalog rights ($42 million) following the business acquisitions in the Company’s former Personal Care segment.

Cash Flows from Discontinued Operations:

	For the nine months ended
	September 30,			September 30,
	2021			2020
	$			$
Cash flows from operating activities		16			58
Cash flows used for investing activities		(3	)		(22	)

13

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 3 – DISCONTINUED OPERATIONS (CONTINUED)

Use of proceeds

The Company used $223 million of the proceeds to repurchase shares (see Note 15 “Shareholder’s equity” for more details). Additionally, the Company repaid the $294 million of outstanding indebtedness under its Term Loan Agreement and redeemed the 4.4% Notes, originally due in 2022, at a redemption price of 100% of the principal amount of $300 million, plus accrued and unpaid interest, as well as a make-whole premium of $11 million (see Note 13 “Long-term debt” for more details).

14

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 4.

_________________

ACQUISITION OF BUSINESS

Purchase of Appvion Point of Sale business

On April 27, 2020, Domtar Corporation completed the acquisition of the Point of Sale paper business from Appvion Operation Inc. The business includes the coater and related equipment located at Appvion’s West Carrollton, Ohio, facility as well as a license for all corresponding intellectual property and assumed liabilities related to post-retirement benefits. The results of this business have been included in the consolidated financial statements as of April 27, 2020. The purchase price was $20 million in cash plus the book value of raw materials and finished goods inventory, subject to post-closing adjustments. The acquisition was accounted for as a business combination under the acquisition method of accounting. The total purchase price was allocated to tangible and intangible assets acquired and liabilities assumed based on the Company’s estimates of their fair value, which was based on information currently available.

The table below illustrates the purchase price allocation:

Fair value of net assets acquired at the date of acquisition
Inventories	$	11
Property, plant and equipment		23
Operating lease right-of-use assets		2
Total assets		36
Less: Assumed Liabilities		6
Fair value of net assets acquired at the date of acquisition		30

15

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 5.

________________

DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT

HEDGING PROGRAMS

The Company is exposed to market risk, such as changes in currency exchange rates, commodity prices, interest rates and prices of the Company’s common stock with regard to the Company’s stock-based compensation program. To the extent the Company decides to manage the volatility related to these exposures, the Company may enter into various financial derivatives that are accounted for under the derivatives and hedging guidance. These transactions are governed by the Company's hedging policies which provide direction on acceptable hedging activities, including instrument type and acceptable counterparty exposure.

Upon inception, the Company formally documents the relationship between hedging instruments and hedged items. At inception and quarterly thereafter, the Company formally assesses whether the financial instruments used in hedging transactions are effective at offsetting changes in either the cash flow or the fair value of the underlying exposures. The Company does not hold derivative financial instruments for trading purposes.

CREDIT RISK

The Company is exposed to credit risk on accounts receivable from its customers. In order to reduce this risk, the Company reviews new customers’ credit history before granting credit and conducts regular reviews of existing customers’ credit performance. As of September 30, 2021, two customers located in the U.S. represented 14% or $79 million, and 12% or $65 million, respectively, of the Company’s receivables (December 31, 2020 – two customers located in the U.S. represented 15% or $58 million, and 12% or $46 million, respectively).

The Company is exposed to credit risk in the event of non-performance by counterparties to its financial instruments. The Company attempts to minimize this exposure by entering into contracts with counterparties that are believed to be of high credit quality. Collateral or other security to support financial instruments subject to credit risk is usually not obtained. The credit standing of counterparties is regularly monitored.

INTEREST RATE RISK

The Company is exposed to interest rate risk arising from fluctuations in interest rates on its cash and cash equivalents, bank indebtedness, revolving credit facility, securitization and long-term debt. The Company’s objective in managing exposure to interest rate changes is to minimize the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. The Company may manage this interest rate exposure through the use of derivative instruments such as interest rate swap contracts, whereby it agrees to exchange the difference between fixed and variable interest amounts calculated by reference to an agreed upon notional principal amount.

EQUITY RISK

The Company is exposed to changes in share prices with regard to its stock-based compensation program. The Company manages its exposure through the use of derivative instruments such as equity swap contracts. In March 2020, the Company entered into a total return swap agreement covering 500,000 common shares maturing on March 4, 2022.

16

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 5. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT (CONTINUED)

COST RISK

Cash flow hedges:

The Company is exposed to price volatility for raw materials and energy used in its manufacturing process. The Company manages its exposure to cost risk primarily through the use of supplier contracts. The Company purchases natural gas at the prevailing market price at the time of delivery. To reduce the impact on cash flow and earnings due to pricing volatility, the Company may utilize derivatives to fix the price of forecasted natural gas purchases. The changes in the fair value on qualifying instruments are included in Accumulated other comprehensive loss to the extent effective, and reclassified into Cost of sales in the period during which the hedged transaction affects earnings. Current contracts are used to hedge a portion of forecasted purchases over the next 27 months.

The following table presents the volumes under derivative financial instruments for natural gas contracts outstanding as of September 30, 2021 to hedge forecasted purchases:

Commodity	Notional contractual quantity under derivative contracts MMBtu(2)		Notional contractual value under derivative contracts (in millions of dollars)			Percentage of forecasted purchases under derivative contracts
Natural gas
2021 (1)		1,975,000		$	6	29%
2022		6,870,000		$	19	26%
2023		2,810,000		$	8	10%

⁽¹⁾ Represents the remaining three months of 2021

⁽²⁾ MMBtu: Millions of British thermal units

The natural gas derivative contracts were effective as of September 30, 2021.

FOREIGN CURRENCY RISK

Cash flow hedges:

The Company has manufacturing operations in the United States and Canada. As a result, it is exposed to movements in foreign currency exchange rates in Canada. Moreover, certain assets and liabilities are denominated in Canadian dollars and are exposed to foreign currency movements. Accordingly, the Company’s earnings are affected by increases or decreases in the value of the Canadian dollar. The Company’s risk management policy allows it to hedge a significant portion of its exposure to fluctuations in foreign currency exchange rates for periods up to three years. The Company may use derivative financial instruments (currency options and foreign exchange forward contracts) to mitigate its exposure to fluctuations in foreign currency exchange rates.

17

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 5. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT (CONTINUED)

Derivatives are used to hedge forecasted purchases in Canadian dollars by the Company’s Canadian subsidiary over the next 22 months. Such derivatives are designated as cash flow hedges. The changes in the fair value on qualifying instruments are included in Accumulated other comprehensive loss to the extent effective, and reclassified into Sales or Cost of sales in the period during which the hedged transaction affects earnings.

The following table presents the currency values under significant currency positions pursuant to currency derivatives outstanding as of September 30, 2021 to hedge forecasted purchases and sales:

Currency exposure hedged	Year of maturity	Notional contractual value	Percentage of forecasted net exposures under contracts	Average Protection rate	Average Obligation rate
CAD/USD	2021 (1)	173 CAD	69%	1 USD = 1.3181	1 USD = 1.3374
CAD/USD	2022	499 CAD	50%	1 USD = 1.3164	1 USD = 1.3302
CAD/USD	2023	146 CAD	15%	1 USD = 1.2601	1 USD = 1.2601

⁽¹⁾Represents the remaining three months of 2021 

The foreign exchange derivative contracts were effective as of September 30, 2021.

FAIR VALUE MEASUREMENT

The accounting standards for fair value measurements and disclosures establish a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three levels. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is available and significant to the fair value measurement.

Level 1 Quoted prices in active markets for identical assets or liabilities.

Level 2 Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 Inputs that are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.

18

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 5. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT (CONTINUED)

The following tables present information about the Company’s financial assets and financial liabilities measured at fair value on a recurring basis (except Long-term debt, see (b) and (c) below) at September 30, 2021 and December 31, 2020, in accordance with the accounting standards for fair value measurements and disclosures and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.

Fair Value of financial instruments at:	September 30, 2021		Quoted prices in active markets for identical assets (Level 1)		Significant observable inputs (Level 2)		Significant unobservable inputs (Level 3)			Balance sheet classification
	$		$		$		$
Derivatives designated as    hedging instruments:
Asset derivatives
Currency derivatives		21		—		21		—	(a)	Prepaid expenses
Natural gas swap contracts		16		—		16		—	(a)	Prepaid expenses
Currency derivatives		1		—		1		—	(a)	Other assets
Natural gas swap contracts		5		—		5		—	(a)	Other assets
Total Assets		43		—		43		—
Liabilities derivatives
Currency derivatives		2		—		2		—	(a)	Trade and other payables
Currency derivatives		2		—		2		—	(a)	Other liabilities and deferred credits
Total Liabilities		4		—		4		—
Other Instruments:
Stock-based compensation -    liability awards		4		4		—		—		Trade and other payables
Stock-based compensation -    liability awards		20		20		—		—		Other liabilities and deferred credits
Equity swap contracts		13		13		—		—		Prepaid expenses
Long-term debt due    within one year		1		—		1		—	(b)	Long-term debt due within one year
Long-term debt		526		—		526		—	(c)	Long-term debt

The net cumulative gain recorded in Accumulated other comprehensive loss relating to natural gas contracts is $21 million at September 30, 2021, of which a gain of $16 million is expected to be recognized in Cost of sales upon maturity of the derivatives over the next 12 months at the then prevailing values, which may be different from those at September 30, 2021.

The net cumulative gain recorded in Accumulated other comprehensive loss relating to currency options and forwards hedging forecasted purchases is $18 million at September 30, 2021, of which a gain of $19 million is expected to be recognized in Cost of sales or Sales upon maturity of the derivatives over the next 12 months at the then prevailing values, which may be different from those at September 30, 2021.

19

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 5. DERIVATIVES AND HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENT (CONTINUED)

Fair Value of financial instruments at:	December 31, 2020		Quoted prices in active markets for identical assets (Level 1)		Significant observable inputs (Level 2)		Significant unobservable inputs (Level 3)			Balance sheet classification
	$		$		$		$
Derivatives designated as    hedging instruments:
Asset derivatives
Currency derivatives		31		—		31		—	(a)	Prepaid expenses
Currency derivatives		16		—		16		—	(a)	Other assets
Natural gas swap contracts		1		—		1		—	(a)	Other assets
Total Assets		48		—		48		—
Liabilities derivatives
Currency derivatives		1		—		1		—	(a)	Trade and other payables
Natural gas swap contracts		2		—		2		—	(a)	Trade and other payables
Natural gas swap contracts		3		—		3		—	(a)	Other liabilities and deferred credits
Total Liabilities		6		—		6		—
Other Instruments:
Stock-based compensation -    liability awards		5		5		—		—		Trade and other payables
Stock-based compensation -    liability awards		11		11		—		—		Other liabilities and deferred credits
Equity swap contracts		2		2						Other assets
Long-term debt due    within one year		13		—		13		—	(b)	Long-term debt due within one year
Long-term debt		1,221		—		1,221		—	(c)	Long-term debt

(a) Fair value of the Company’s derivatives are classified under Level 2 (inputs that are observable; directly or indirectly) as it is measured as follows:

- For currency derivatives: Foreign currency forward and option contracts are valued using standard valuation models. Interest rates, forward market rates and volatility are used as inputs for such valuation techniques.

- For natural gas contracts: Fair value is measured using the discounted difference between contractual rates and quoted market future rates.

(b) Fair value of the Company’s long-term debt is measured by comparison to market prices of its debt. The Company’s long-term debt is not carried at fair value on the Consolidated Balance Sheets at September 30, 2021 and December 31, 2020. The carrying value of the Company’s long-term debt due within one year is $1 million and $13 million at September 30, 2021 and December 31, 2020, respectively.

(c) The carrying value of the Company’s long-term debt is $503 million and $1,084 million at September 30, 2021 and December 31, 2020, respectively.

Due to their short-term maturity, the carrying amounts of cash and cash equivalents, receivables, bank indebtedness, trade and other payables and income and other taxes approximate their fair values.

20

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 6.

_________________

EARNINGS (LOSS) PER COMMON SHARE

The following table provides the reconciliation between basic and diluted earnings (loss) per common share:

	For the three months ended					For the nine months ended
	September 30,		September 30,			September 30,			September 30,
	2021		2020			2021			2020
Earnings (loss) from continuing operations	$	74	$	(111	)	$	105		$	(129	)
Earnings (loss) from discontinued operations, net of taxes	$	—	$	19		$	(23	)	$	61
Net earnings (loss)	$	74	$	(92	)	$	82		$	(68	)
Weighted average number of common shares    outstanding (millions)		50.4		55.2			51.4			55.5
Effect of dilutive securities (millions)		0.3		—			0.2			—
Weighted average number of diluted common shares    outstanding (millions)		50.7		55.2			51.6			55.5
Basic net earnings (loss) per common share (in dollars)
Earnings (loss) from continuing operations	$	1.47	$	(2.01	)	$	2.04		$	(2.33	)
Earnings (loss) from discontinued operations	$	—	$	0.34		$	(0.44	)	$	1.10
Basic net earnings (loss) per common share	$	1.47	$	(1.67	)	$	1.60		$	(1.23	)
Diluted net earnings (loss) per common share (in dollars)
Earnings (loss) from continuing operations	$	1.46	$	(2.01	)	$	2.03		$	(2.33	)
Earnings (loss) from discontinued operations	$	—	$	0.34		$	(0.44	)	$	1.10
Diluted net earnings (loss) per common share	$	1.46	$	(1.67	)	$	1.59		$	(1.23	)

The following table provides the securities that could potentially dilute basic earnings (loss) per common share in the future, but were not included in the computation of diluted earnings (loss) per common share because to do so would have been anti-dilutive:

	For the three months ended				For the nine months ended
	September 30,		September 30,		September 30,		September 30,
	2021		2020		2021		2020
Options to purchase common shares		—		407,662		—		407,662

21

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 7.

_________________

PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS

DEFINED CONTRIBUTION PLANS

The Company has several defined contribution plans and multiemployer plans. The pension expense under these plans is equal to the Company’s contribution. For the three and nine months ended September 30, 2021, the pension expense was $9 million and $27 million, respectively (2020 – $10 million and $29 million, respectively).

DEFINED BENEFIT PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS

The Company sponsors both contributory and non-contributory U.S. and non-U.S. defined benefit pension plans. Non-unionized employees in Canada joining the Company after January 1, 1998 participate in a defined contribution pension plan. Salaried employees in the U.S. joining the Company after January 1, 2008 participate in a defined contribution pension plan. Unionized and non-union hourly employees in the U.S. who are not grandfathered under the existing defined benefit pension plans, participate in a defined contribution pension plan for future service. The Company also sponsors a number of other post-retirement benefit plans for eligible U.S. and non-U.S. employees; the plans are unfunded and include life insurance programs and medical and dental benefits. The Company also provides supplemental unfunded defined benefit pension plans and supplemental unfunded defined contribution pension plans to certain senior management employees.

Components of net periodic benefit cost for pension plans and other post-retirement benefit plans:

	For the three months ended					For the nine months ended
	September 30, 2021					September 30, 2021
	Pension plans			Other post-retirement benefit plans		Pension plans			Other post-retirement benefit plans
	$			$		$			$
Service cost		8			1		22			1
Interest expense		7			—		23			1
Expected return on plan assets		(16	)		—		(49	)		—
Amortization of net actuarial loss (gain)		2			—		6			(1	)
Settlement gain		(1	)		—		—			—
Amortization of prior year service costs		—			—		1			—
Net periodic benefit cost		—			1		3			1

Components of net periodic benefit cost for pension plans and other post-retirement benefit plans:

	For the three months ended					For the nine months ended
	September 30, 2020					September 30, 2020
	Pension plans			Other post-retirement benefit plans		Pension plans			Other post-retirement benefit plans
	$			$		$			$
Service cost		7			—		21			1
Interest expense		10			—		30			1
Expected return on plan assets		(17	)		—		(51	)		—
Amortization of net actuarial loss (gain)		3			—		7			(1	)
Curtailment loss		2			—		2			—
Amortization of prior year service costs		—			—		1			—
Net periodic benefit cost		5			—		10			1

22

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 7. PENSION PLANS AND OTHER POST-RETIREMENT BENEFIT PLANS (CONTINUED)

The components of net periodic benefit cost for pension plans and other post-retirement benefits plans, other than service cost, are presented in Non-service components of net periodic benefit cost on the Consolidated Statement of Earnings (Loss) and Comprehensive Income (Loss).

For the three and nine months ended September 30, 2021, the Company contributed $3 million and $11 million, respectively (2020 – $8 million and $12 million, respectively) to the pension plans and $1 million  and $3 million, respectively (2020 – $1 million and $3 million, respectively) to the other post-retirement benefit plans.

23

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 8.

_________________

OTHER OPERATING INCOME, NET

Other operating income, net is an aggregate of both recurring and non-recurring loss or income items and, as a result, can fluctuate from period to period. The Company’s other operating income, net includes the following:

	For the three months ended						For the nine months ended
	September 30,			September 30,			September 30,			September 30,
	2021			2020			2021			2020
	$			$			$			$
Bad debt expense		—			—			(2	)		5
Environmental provision		1			—			2			1
Non-production agreement terminated		—			—			—			(7	)
Foreign exchange (gain) loss		(2	)		1			—			—
Net gain on sale of property, plant and equipment		(3	)		—			(3	)		—
Other		(1	)		(1	)		(3	)		(2	)
Other operating income, net		(5	)		—			(6	)		(3	)

24

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 9.

_________________

INCOME TAXES

For the third quarter of 2021, the Company’s income tax expense was $22 million, consisting of a current income tax expense of $28 million and a deferred income tax benefit of $6 million. This compares to an income tax benefit of $52 million in the third quarter of 2020, consisting of a current income tax benefit of $10 million and a deferred income tax benefit of $42 million. The Company made income tax payments, net of refunds, of $17 million during the third quarter of 2021. The effective tax rate was 23% compared with an effective tax rate of 32% in the third quarter of 2020. The Company’s tax provision for interim periods is determined using an estimate of its annual effective tax rate and then adjusting for discrete items arising in that quarter. In each interim quarter the Company updates its estimate of the annual effective tax rate and, if the estimated annual tax rate changes, makes a cumulative adjustment in that quarter. The effective tax rate for the third quarter of 2020 was significantly impacted by such an adjustment, mainly due to a change in the mix of earnings or loss between jurisdictions. The effective tax rate for the third quarter of 2020 was also favorably impacted by the CARES Act, which granted companies the ability to carry back tax losses generated in the U.S. in 2020 to a tax year with a higher statutory tax rate.

For the first nine months of 2021, the Company’s income tax expense was $38 million, consisting of a current income tax expense of $43 million and a deferred income tax benefit of $5 million. This compares to an income tax benefit of $60 million in the first nine months of 2020, consisting of a current income tax benefit of $15 million and a deferred income tax benefit of $45 million. The Company made payments, net of refunds, of $18 million during the first nine months of 2021. The effective tax rate was 27% compared to an effective tax rate of 32% in the first nine months of 2020. The effective tax rate for the first nine months of 2021 was significantly impacted by certain transaction costs incurred during the period related to the potential acquisition of the Company by Paper Excellence which provide no tax benefit. The effective tax rate for the first nine months of 2020 was significantly impacted by the mix of earnings or loss in the Company’s major jurisdictions, by the recognition of additional tax credits in various jurisdictions, and by the ability to carry back U.S. tax losses generated in 2020 to a tax year with a higher statutory tax rate. These favorable impacts were partially offset by an increase in the valuation allowance related to the expected realization of certain U.S. state tax credits.

25

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 10.

_________________

INVENTORIES

The following table presents the components of inventories:

	September 30,		December 31,
	2021		2020
	$		$
Work in process and finished goods		324	321
Raw materials		110	107
Operating and maintenance supplies		210	202
		644	630

26

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 11.

_________________

LEASES

In the normal course of business, the Company enters into operating and finance leases mainly for manufacturing and warehousing facilities, corporate offices, motor vehicles, mobile equipment and manufacturing equipment.

While the Company’s lease payments are generally fixed over the lease term, some leases may include price escalation terms that are fixed at the lease commencement date.

The Company has remaining lease terms ranging from 1 year to 11 years, some of which may include options to extend the leases for up to 10 years, and some of which may include options to terminate the leases within 1 year.

The components of lease expense were as follows:

	For the three months ended				For the nine months ended
	September 30,		September 30,		September 30,		September 30,
	2021		2020		2021		2020
	$		$		$		$
Operating lease expense		5		6		16		17
Finance lease expense:
Amortization of right-of-use assets		1		—		1		—
Interest on lease liabilities		—		—		—		—
Total finance lease expense		1		—		1		—

Supplemental cash flow information related to leases was as follows:

		For the nine months ended
		September 30,		September 30,
		2021		2020
		$		$
Cash paid for amounts included in the measurement of lease    liabilities:
	Operating cash flows from operating leases		18		17
	Operating cash flows from finance leases		1		1
	Financing cash flows from finance leases		1		1
Right-of-use assets obtained in exchange for lease liabilities:
	Operating leases		2		5

27

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 11. LEASES (CONTINUED)

Supplemental balance sheet information related to leases was as follows:

			September 30,			December 31,
			2021			2020
			$			$
Operating leases
	Operating leases right-of-use assets			45			59
	Lease liabilities due within one year			19			20
	Long-term operating lease liabilities			40			50
				59			70
Finance leases
	Property, plant and equipment			11			11
	Accumulated depreciation			(4	)		(3	)
				7			8
	Long-term debt due within one year			1			1
	Long-term debt			8			9
				9			10
	Weighted-average remaining lease term
		Operating leases	4.5 years			4.7 years
		Finance leases	8.2 years			8.8 years
	Weighted-average discount rate
		Operating leases		4.4	%		4.4	%
		Finance leases		6.1	%		6.1	%

28

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 11. LEASES (CONTINUED)

Maturities of lease liabilities at September 30, 2021 were as follows:

	Operating leases		Finance leases
	September 30,		September 30,
	2021		2021
	$		$
2021 (1)		5		—
2022		18		2
2023		15		2
2024		11		1
2025		6		1
Thereafter		10		5
Total lease payments		65		11
Less: Imputed interest		6		2
Total lease liabilities		59		9

⁽¹⁾ Represents the remaining three months of 2021.

29

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 12.

_________________

CLOSURE AND RESTRUCTURING COSTS AND IMPAIRMENT OF LONG-LIVED ASSETS

Paper Excellence to Acquire Domtar Corporation

On May 10, 2021, Domtar and Paper Excellence, a global diversified manufacturer of pulp and specialty, printing, writing, and packaging papers, entered into a business combination agreement under which the Paper Excellence group of companies will acquire all of the issued and outstanding shares of Domtar common stock for $55.50 per share, in cash. The all-cash transaction represents an enterprise value of approximately $3 billion. The transaction is expected to close in the fourth quarter of 2021, subject to receipt of the required regulatory approvals and other customary closing conditions. As a result, during the three and nine months ended September 30, 2021, the Company recorded $5 million and $23 million, respectively, of transaction fees under Closure and restructuring costs on the Consolidated Statement of Earnings (Loss) and Comprehensive Income (Loss).

Cost reduction program

The Company implemented a cost savings program. As part of this program, on August 7, 2020, the Company announced the permanent closure of the uncoated freesheet manufacturing at the Kingsport, Tennessee and Port Huron, Michigan mills, the remaining paper machine at the Ashdown, Arkansas mill and the converting center in Ridgefields, Tennessee. Additionally, on May 7, 2021, the Company announced the closure of the converting center in Dallas, Texas. These actions reduced the Company’s annual uncoated freesheet paper capacity by approximately 721,000 short tons, and resulted in a workforce reduction of approximately 750 employees. The Kingsport and Ashdown paper machines, which have been idled since April 2020, did not recommence operations. The Ridgefields converting center ceased operations at the end of the third quarter of 2020, while the Port Huron mill shut down at the end of February 2021 and the Dallas converting center ceased operations at the beginning of July 2021. For the three and nine months ended September 30, 2021, the Company recorded $1 million and $8 million, respectively, of accelerated depreciation under Impairment of long-lived assets, $1 million and $5 million, respectively, of severance and termination costs, $1 million and nil, respectively, of pension settlement gain and nil and $4 million, respectively, of other costs under Closure and restructuring costs on the Consolidated Statement of Earnings (Loss) and Comprehensive Income (Loss). During the third quarter of 2020, the Company recorded $111 million of accelerated depreciation under Impairment of long-lived assets on the Consolidated Statement of Earnings (Loss) and Comprehensive Income (Loss). Additionally, the Company recorded $29 million of severance and termination costs, $31 million of inventory obsolescence, $2 million of pension curtailment loss and $6 million of other costs, under Closure and restructuring costs on the Consolidated Statement of Earnings (Loss) and Comprehensive Income (Loss).

Conversion of Kingsport, Tennessee mill

The Company plans to enter the linerboard market with the conversion of the Kingsport paper machine. Once in full operation, the mill will produce and market approximately 600,000 tons annually of high-quality recycled linerboard and medium, providing the Company with a strategic footprint in a growing adjacent market. The conversion is expected to be completed by the end of 2022. The Company estimates the conversion cost to be approximately $350 million. For the three and nine months ended September 30, 2021, the Company recorded $9 million and $22 million, respectively, under Asset conversion costs on the Consolidated Statement of Earnings (Loss) and Comprehensive Income (Loss).

Restart of the paper machine at Ashdown, Arkansas mill

On July 15, 2021, Domtar announced its intention to restart the paper machine at the Ashdown, Arkansas mill to add an additional 185,000 tons per year of uncoated freesheet production capacity to its manufacturing network. The increase is necessary to meet growing customer demand as the economy recovers from the COVID-19 pandemic. The additional paper capacity will result in a capacity reduction of 185,000 ADMT per year of baled SBSK pulp at the mill. However, it will not impact Ashdown's fluff pulp production capacity, or Domtar's commitment to serving its key hygiene customers around the world. Additionally, the Company has a dedicated team developing a kraft linerboard project for the Ashdown Mill, and the decision to restart the paper machine will not impact the Company's intention to produce containerboard and other packaging products at the facility. The machine is expected to resume full operation in January 2022 following a period of time to ramp up to full production. The Company estimates the restart will cost approximately $10 million.

30

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 12. CLOSURE AND RESTRUCTURING COSTS AND IMPAIRMENT OF LONG-LIVED ASSETS (CONTINUED)

Other costs

For the three and nine months ended September 30, 2021, other costs related to previous and ongoing closures and restructuring included nil and $1 million, respectively, of other costs (2020 – nil and $1 million of severance and termination costs).

31

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 13.

_________________

LONG-TERM DEBT

4.4% UNSECURED NOTES

On April 8, 2021, the Company redeemed the 4.4% Notes, originally due in 2022, at a redemption price of 100% of the principal amount of $300 million, plus accrued and unpaid interest, as well as a make-whole premium of $11 million.

TERM LOAN

On March 11, 2021, the Company fully repaid its Term Loan Agreement, originally maturing on May 5, 2025, in the amount of $294 million and wrote-off $2 million of unamortized debt issuance costs related to this repayment.

32

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 14.

_________________

CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY COMPONENT

The following table presents the changes in Accumulated other comprehensive loss by component⁽¹⁾ for the nine months ended September 30, 2021 and the year ended December 31, 2020:

	Net derivative gains (losses) on cash flow hedges			Pension items(2)			Post-retirement benefit items(2)			Foreign currency items			Total
	$			$			$			$			$
Balance at December 31, 2019		(5	)		(197	)		11			(202	)		(393	)
Natural gas swap contracts		1		N/A			N/A			N/A				1
Currency options		3		N/A			N/A			N/A				3
Foreign exchange forward contracts		23		N/A			N/A			N/A				23
Net loss	N/A				(21	)		(1	)	N/A				(22	)
Foreign currency items	N/A			N/A			N/A				63			63
Other comprehensive income (loss)    before reclassifications		27			(21	)		(1	)		63			68
Amounts reclassified from Accumulated    other comprehensive loss		12			11			(2	)		—			21
Net current period other comprehensive    income (loss)		39			(10	)		(3	)		63			89
Balance at December 31, 2020		34			(207	)		8			(139	)		(304	)
Natural gas swap contracts		24		N/A			N/A			N/A				24
Foreign exchange forward contracts		3		N/A			N/A			N/A				3
Net gain	N/A				29			—		N/A				29
Foreign currency items	N/A			N/A			N/A				63			63
Other comprehensive income    before reclassifications		27			29			—			63			119
Amounts reclassified from Accumulated    other comprehensive loss		(25	)		9			(1	)		—			(17	)
Net current period other comprehensive    income (loss)		2			38			(1	)		63			102
Balance at September 30, 2021		36			(169	)		7			(76	)		(202	)

⁽¹⁾ All amounts are after tax. Amounts in parentheses indicate losses.

⁽²⁾ The projected benefit obligation is actuarially determined on an annual basis as of December 31.

33

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 14. CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY COMPONENT (CONTINUED)

The following tables present reclassifications out of Accumulated other comprehensive loss for the three and nine months ended September 30, 2021 and 2020:

Details about Accumulated other comprehensive loss components	Amounts reclassified from Accumulated other comprehensive loss
	For the three months ended
	September 30, 2021			September 30, 2020
	$			$
Net derivative gains (losses) on cash flow hedge
Natural gas swap contracts (1)		7			(2	)
Currency options and forwards (1)		7			—
Total before tax		14			(2	)
Tax (expense) benefit		(3	)		1
Net of tax		11			(1	)
Amortization of defined benefit pension items
Amortization of net actuarial loss (3)		(1	)		(3	)
Curtailment loss (3)		—			(2	)
Total before tax		(1	)		(5	)
Tax benefit		—			2
Net of tax		(1	)		(3	)
Amortization of other post-retirement benefit items
Amortization of net actuarial gain (3)		—			—
Total before tax		—			—
Tax expense		—			—
Net of tax		—			—

34

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 14. CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS BY COMPONENT (CONTINUED)

	Amounts reclassified from Accumulated other comprehensive loss
	For the nine months ended
	September 30, 2021			September 30, 2020
	$			$
Net derivatives gains (losses) on cash flow hedge
Natural gas swap contracts (1)		6			(10	)
Currency options and forwards (1)		33			(9	)
Net investment hedge (2)		(9	)		—
Total before tax		30			(19	)
Tax (expense) benefit		(5	)		5
Net of tax		25			(14	)
Amortization of defined benefit pension items
Amortization of net actuarial loss (3)		(6	)		(7	)
Curtailment loss (3)		—			(2	)
Amortization of prior year service costs (3)		(1	)		(1	)
Discontinued operations		(4	)		—
Total before tax		(11	)		(10	)
Tax benefit		2			3
Net of tax		(9	)		(7	)
Amortization of other post-retirement benefit items
Amortization of net actuarial gain (3)		1			1
Total before tax		1			1
Tax expense		—			—
Net of tax		1			1

⁽¹⁾ These amounts are included in Cost of Sales in the Consolidated Statements of Earnings (Loss) and Comprehensive Income (Loss).

⁽²⁾ This amount is included in Earnings (loss) from discontinued operations, net of taxes in the Consolidated Statements of Earnings (Loss) and Comprehensive Income (Loss).

⁽³⁾ These amounts are included in the computation of net periodic benefit cost (see Note 7 “Pension Plans and Other Post-Retirement Benefit Plans” for more details).

35

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 15.

_________________

SHAREHOLDERS’ EQUITY

DIVIDENDS

On February 18, 2020, the Company’s Board of Directors approved a quarterly dividend of $0.455 per share, to be paid to holders of the Company’s common stock. Total dividends of approximately $25 million were paid on April 15, 2020 to shareholders of record on April 2, 2020. On May 5, 2020, due to the unprecedented market conditions and uncertainty caused by COVID-19, the Company suspended the payment of its regular quarterly dividend and stock repurchase program in order to preserve cash and provide additional flexibility in the current environment.

STOCK REPURCHASE PROGRAM

The Company’s Board of Directors has authorized a stock repurchase program (the “Program”) of up to $1.6 billion. The Company is authorized to repurchase, from time to time, shares of its outstanding common stock on the open market or in privately negotiated transactions. The timing and amount of stock repurchases will depend on a variety of factors, including the market conditions as well as corporate and regulatory considerations. The Program may be suspended, modified or discontinued at any time, and the Company has no obligation to repurchase any amount of its common stock under the Program. The Program has no set expiration date. The Company repurchases its common stock in part to reduce the dilutive effects of stock options and awards, and to improve shareholders’ returns.

The Company makes open market purchases of its common stock using general corporate funds. Additionally, the Company may enter into structured stock repurchase agreements with large financial institutions using general corporate funds in order to lower the average cost to acquire shares. The agreements would require the Company to make up-front payments to the counterparty financial institutions, which would result in either the receipt of stock at the beginning of the term of the agreements followed by a share adjustment at the maturity of the agreements, or the receipt of either stock or cash at the maturity of the agreements, depending upon the price of the stock.

On February 11, 2021, the Company announced that it would resume its stock repurchase program. The Board of Directors will continue to evaluate the Company’s capital return program based upon customary considerations, including market conditions.

On March 2, 2021, the Company entered into an accelerated share repurchase (“ASR”) agreement with JPMorgan Chase Bank, N.A. to repurchase $200 million of its common stock with available cash on hand, including cash received from the divestiture of its Personal Care segment closed on March 1, 2021.

Under the ASR agreement, the Company paid $200 million in exchange for the delivery of 4,430,906 shares. The transaction was completed in September 2021, at which time the Company paid an additional $15 million to JPMorgan Chase Bank N.A. to settle the agreement.

During the first nine months of 2021, the Company repurchased a total of 5,060,865 shares at an average price of $46.96 for a total cost of $238 million.

During the first nine months of 2020, the Company repurchased 1,798,306 shares at an average price of $33.05 for a total cost of $59 million.

36

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 16.

_________________

COMMITMENTS AND CONTINGENCIES

ENVIRONMENTAL MATTERS

The Company is subject to environmental laws and regulations enacted by federal, provincial, state and local authorities. The Company may also incur substantial costs in relation to enforcement actions (including orders requiring corrective measures, installation of pollution control equipment or other remedial actions) as a result of violations of, or liabilities under, environmental laws and regulations applicable to its past and present properties. The Company’s ongoing efforts to identify potential environmental concerns that may be associated with such properties may result in additional environmental costs and liabilities which cannot be reasonably estimated at this time.

A former owner of the Company’s Dryden, Ontario manufacturing site (the "Dryden Property") operated a chlor-alkali plant during the 1960s and 1970s, during which time, mercury and other pollutants were used and discharged into the environment. In conjunction with the sale and redevelopment of the Dryden Property, the Province of Ontario (the “Province”) provided a broad indemnity (the "Indemnity") in 1985 to the then purchaser of the Dryden Property and its successors and assigns with respect to the discharge of any pollutants, including mercury, by the historical operators of the Dryden Property. This Indemnity subsequently was assigned to the Company in connection with its 2007 purchase of the Dryden Property.

As the current owner of the Dryden Property, the Company is actively engaged with the Province with respect to the management of the historical contamination.

The Province issued a Director's order under environmental laws to certain prior owners of the Dryden Property in connection with a nearby waste disposal site that never has been owned by the Company. The Director's order required certain work to be conducted by those prior owners. The prior owners asserted that the Indemnity covered the work required by the Director’s order. Following extensive litigation, the Supreme Court of Canada found, among other things, that the Indemnity covered third-party claims, but not first-party claims, such as the Director's order.

In the future, the Province may challenge whether the Company has the benefit of the Indemnity. In addition to the Indemnity, Domtar has other recourses relating to the historical contamination.

The situation involving the historical contamination is continuing to develop, and the Company cannot predict its outcome. While the Company currently does not believe that it will be required to incur costs that would have a material impact on its results of operations or financial condition, there is no certainty that this is in fact the case.

The following table reflects changes in the reserve for environmental remediation and asset retirement obligations:

	September 30, 2021
	$
Balance at beginning of year		47
Additions and other changes		2
Environmental spending		(3	)
Balance at end of period		46

The U.S. Environmental Protection Agency (the “EPA”) and/or various state agencies have notified the Company that it may be a potentially responsible party under the Comprehensive Environmental Response Compensation and Liability Act, commonly known as “Superfund,” and similar state laws with respect to other hazardous waste sites as to which no proceedings have been instituted against the Company. The Company continues to take remedial action under its Care and Control Program at its former wood preserving sites, and at a number of former operating sites due to possible soil, sediment or groundwater contamination.

37

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 16. COMMITMENTS AND CONTINGENCIES (CONTINUED)

CONTINGENCIES

In the normal course of operations, the Company becomes involved in various legal actions mostly related to contract disputes, patent infringements, environmental and product warranty claims, and labor issues. While the final outcome with respect to actions outstanding or pending at September 30, 2021, cannot be predicted with certainty, it is management’s opinion that their resolution will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.

INDEMNIFICATIONS

In the normal course of business, the Company offers indemnifications relating to the sale of its businesses and real estate. In general, these indemnifications may relate to claims from past business operations, compliance with laws, the failure to abide by covenants and the breach of representations and warranties included in the sales agreements. Typically, such representations and warranties relate to taxation, environmental, product and employee matters. The terms of these indemnification agreements are generally for an unlimited period of time. At September 30, 2021, the Company is unable to estimate the potential maximum liabilities for these types of indemnification guarantees as the amounts are contingent upon the outcome of future events, the nature and likelihood of which cannot be reasonably estimated at this time. Accordingly, no provision has been recorded. These indemnifications have not yielded a significant expense in the past.

Pension Plans

The Company has indemnified and held harmless the trustees of its pension funds, and the respective officers, directors, employees and agents of such trustees, from any and all costs and expenses arising out of the performance of their obligations under the relevant trust agreements, including in respect of their reliance on authorized instructions from the Company or for failing to act in the absence of authorized instructions. These indemnifications survive the termination of such agreements. As of September 30, 2021, the Company has not recorded a liability associated with these indemnifications, as it does not expect to make any payments pertaining to these indemnifications.

CLIMATE CHANGE AND AIR QUALITY REGULATION

Various national and local laws and regulations relating to climate change have been established or are emerging in jurisdictions where the Company currently has, or may have in the future, manufacturing facilities or investments.

The EPA repealed the Clean Power Plan and replaced it with the “Affordable Clean Energy” (“ACE”) rule. The ACE rule was legally challenged in the U.S. Court of Appeals for the D.C. Circuit. The Court ruled the EPA wrongly understood the Clean Air Act vacated the ACE rule, sending it back to EPA for further consideration. The court also rejected the embedded repeal of the Clean Power Plan, but the court stayed its mandate as to that part of its decision to avoid reinstating that now outdated Clean Power Plan. Four petitions of certiorari have been filed with the United States Supreme Court seeking review of the D.C. Circuit’s decision, and the Supreme Court is expected to decide whether to take the case this Fall. Regardless of the outcome of the petitions for certiorari and EPA’s further consideration, the Company does not expect to be disproportionately affected compared with other pulp and paper producers located in the states where the Company operates.

The province of Quebec has a greenhouse gas (“GHG”) cap-and-trade system with reduction targets. British Columbia has a carbon tax that applies to the purchase of fossil fuels within the province. The Company does not expect its facilities to be disproportionately affected by these measures compared to the other pulp and paper producers located in these provinces.

The Government of Canada has established a federal carbon pricing system in provinces that do not already impose a cost on carbon emissions. The Government of Canada has imposed its carbon pricing program for regulating GHG emissions in Ontario, which took effect on January 1, 2019. To reduce GHG emissions and recognize the unique circumstances of the province’s diverse economy, Ontario finalized its own GHG Emission Performance Standards regulation. The Canadian Government has accepted Ontario’s program as an alternative to the federal program and the transition for Ontario facilities from the federal program to the Ontario program is expected to occur on January 1, 2022. The Company does not expect to be disproportionately affected compared with other pulp and paper producers located in Ontario.

38

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 16. COMMITMENTS AND CONTINGENCIES (CONTINUED)

The EPA proposed to revise its Industrial Boiler Maximum Achievable Control Technology Standard (“MACT”), or Boiler MACT, in a notice published on August 24, 2020. The proposed rule is a response to two court decisions that remanded certain issues for further review by the EPA, and it includes revisions to 34 different emission limitations that could apply to some of the Company’s facilities. The EPA had planned to issue the final rule in September 2021, but the final rule has been delayed. Although the EPA has indicated that a small number of facilities may need to reduce emissions further compared to the current limits, the Company does not expect its facilities to be disproportionately affected compared to other U.S. pulp and paper producers.

39

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 17.

_________________

SEGMENT DISCLOSURES

Following the sale of the Company’s Personal Care business on March 1, 2021, the Company now operates as a single reportable segment as described below, which also represents its only operating segment:

• Pulp and Paper – consists of the design, manufacturing, marketing and distribution of communication, specialty and packaging papers, as well as softwood, hardwood and fluff pulp, and high quality airlaid ultrathin laminated cores.

An analysis and reconciliation of the Company’s business segment information to the respective information in the financial statements is as follows:

	For the three months ended						For the nine months ended
SEGMENT DATA	September 30, 2021			September 30, 2020			September 30, 2021			September 30, 2020
	$			$			$			$
Sales by product group
Communication papers		513			483			1,499			1,491
Specialty and packaging papers		154			148			436			425
Market pulp		353			257			1,018			782
Absorbent core materials		11			11			32			34
Consolidated sales		1,031			899			2,985			2,732
Operating income (loss) from continuing operations (1)
Pulp and Paper		108			(140	)		215			(133	)
Corporate		(12	)		(12	)		(49	)		(24	)
Consolidated operating income (loss) from continuing    operations		96			(152	)		166			(157	)
Interest expense, net		7			14			42			43
Non-service components of net periodic benefit cost		(7	)		(4	)		(19	)		(13	)
Earnings (loss) before income taxes and equity loss		96			(162	)		143			(187	)
Income tax expense (benefit)		22			(52	)		38			(60	)
Equity method investment loss, net of taxes		—			1			—			2
Earnings (loss) from continuing operations		74			(111	)		105			(129	)
Earnings (loss) from discontinued operations, net of taxes		—			19			(23	)		61
Net earnings (loss)		74			(92	)		82			(68	)

⁽¹⁾ The Government of Canada created the Canada Emergency Wage Subsidy (“CEWS”) to provide financial support for businesses during the COVID-19 pandemic and prevent large layoffs. For the nine months ended September 30, 2021, the Company recognized $7 million as a reduction of costs related to this program (CDN $9 million) ($6 million in Cost of sales (CDN $7 million) and $1 million in Selling, general and administrative (CDN $2 million)).

40

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 18.

_________________

SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION

The following information is presented as required under Rule 3-10 of Regulation S-X, in connection with the Company’s issuance of debt securities that are fully and unconditionally guaranteed by Domtar’s significant 100% owned domestic subsidiaries, including Domtar Paper Company, LLC, Domtar Industries LLC (and subsidiaries, excluding Domtar Funding LLC), Domtar A.W. LLC, and EAM Corporation, (“Guarantor Subsidiaries”), on a joint and several basis. The Guaranteed Debt is not guaranteed by certain of Domtar’s foreign and non-significant domestic subsidiaries, all 100% owned, (collectively the “Non-Guarantor Subsidiaries”). A subsidiary’s guarantee may be released in certain customary circumstances, such as if the subsidiary is sold or sells all of its assets, if the subsidiary’s guarantee of the Credit Agreement is terminated or released and if the requirements for legal defeasance to discharge the indenture have been satisfied.

Prior to the sale of the Company’s Personal Care Business on March 1, 2021, Attends Healthcare Products Inc., Associated Hygienic Products LLC and Home Delivery Incontinent Supplies Co, were Guarantor Subsidiaries.

The following supplemental condensed consolidating financial information sets forth, on an unconsolidated basis, the Balance Sheets at September 30, 2021 and December 31, 2020, the Statements of Earnings (Loss) and Comprehensive Income (Loss) for the three and nine months ended September 30, 2021 and 2020 and the Statements of Cash Flows for the nine months ended September 30, 2021 and 2020 for Domtar Corporation (the “Parent”), and on a combined basis for the Guarantor Subsidiaries and, on a combined basis, the Non-Guarantor Subsidiaries. The supplemental condensed consolidating financial information reflects the investments of the Parent in the Guarantor Subsidiaries, as well as the investments of the Guarantor Subsidiaries in the Non-Guarantor Subsidiaries, using the equity method.

	For the three months ended
	September 30, 2021
							Non-
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS				Guarantor			Guarantor			Consolidating
AND COMPREHENSIVE INCOME	Parent			Subsidiaries			Subsidiaries			Adjustments			Consolidated
	$			$			$			$			$
Sales		—			900			417			(286	)		1,031
Operating expenses
Cost of sales, excluding depreciation and amortization		(5	)		754			339			(286	)		802
Depreciation and amortization		—			38			15			—			53
Selling, general and administrative		2			33			35			—			70
Impairment of long-lived assets		—			1			—			—			1
Closure and restructuring costs		1			2			2			—			5
Asset conversion costs		—			9			—			—			9
Other operating loss (income), net		2			(2	)		(5	)		—			(5	)
		—			835			386			(286	)		935
Operating income		—			65			31			—			96
Interest expense (income), net		8			16			(17	)		—			7
Non-service components of net periodic benefit cost		—			(3	)		(4	)		—			(7	)
(Loss) earnings before income taxes		(8	)		52			52			—			96
Income tax (benefit) expense		(2	)		14			10			—			22
Share in earnings of equity accounted investees		80			42			—			(122	)		—
Earnings from continuing operations		74			80			42			(122	)		74
Loss from discontinued operations, net of taxes		—			—			—			—			—
Net earnings		74			80			42			(122	)		74
Other comprehensive loss		(20	)		(29	)		(20	)		49			(20	)
Comprehensive income		54			51			22			(73	)		54

41

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 18. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

	For the nine months ended
	September 30, 2021
							Non-
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS				Guarantor			Guarantor			Consolidating
AND COMPREHENSIVE INCOME	Parent			Subsidiaries			Subsidiaries			Adjustments			Consolidated
	$			$			$			$			$
Sales		—			2,571			1,235			(821	)		2,985
Operating expenses
Cost of sales, excluding depreciation and amortization		(5	)		2,241			985			(821	)		2,400
Depreciation and amortization		—			114			46			—			160
Selling, general and administrative		1			43			158			—			202
Impairment of long-lived assets		—			8			—			—			8
Closure and restructuring costs		16			14			3			—			33
Asset conversion costs		—			22			—			—			22
Other operating loss (income), net		1			(4	)		(3	)		—			(6	)
		13			2,438			1,189			(821	)		2,819
Operating (loss) income		(13	)		133			46			—			166
Interest expense (income), net		44			46			(48	)		—			42
Non-service components of net periodic benefit cost		—			(8	)		(11	)		—			(19	)
(Loss) earnings before income taxes		(57	)		95			105			—			143
Income tax (benefit) expense		(11	)		25			24			—			38
Share in earnings of equity accounted investees		141			87			—			(228	)		—
Earnings from continuing operations		95			157			81			(228	)		105
(Loss) earnings from discontinued operations, net of taxes		(13	)		(16	)		6			—			(23	)
Net earnings		82			141			87			(228	)		82
Other comprehensive income		102			83			69			(152	)		102
Comprehensive income		184			224			156			(380	)		184

42

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 18. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

	For the three months ended
	September 30, 2020
							Non-
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS				Guarantor			Guarantor			Consolidating
(LOSS) AND COMPREHENSIVE INCOME (LOSS)	Parent			Subsidiaries			Subsidiaries			Adjustments			Consolidated
	$			$			$			$			$
Sales		—			802			346			(249	)		899
Operating expenses
Cost of sales, excluding depreciation and amortization		—			725			274			(249	)		750
Depreciation and amortization		—			40			16			—			56
Selling, general and administrative		2			(12	)		76			—			66
Impairment of long-lived assets		—			111			—			—			111
Closure and restructuring costs		—			64			4			—			68
		2			928			370			(249	)		1,051
Operating loss		(2	)		(126	)		(24	)		—			(152	)
Interest expense (income), net		17			18			(21	)		—			14
Non-service components of net periodic benefit cost		—			(1	)		(3	)		—			(4	)
Loss before income taxes and equity loss		(19	)		(143	)		—			—			(162	)
Income tax expense (benefit)		59			(107	)		(4	)		—			(52	)
Equity method investment loss, net of taxes		—			—			1			—			1
Share in earnings of equity accounted investees		(14	)		142			—			(128	)		—
(Loss) earnings from continuing operations		(92	)		106			3			(128	)		(111	)
(Loss) earnings from discontinued operations, net of taxes		—			(120	)		139			—			19
Net (loss) earnings		(92	)		(14	)		142			(128	)		(92	)
Other comprehensive income		23			16			41			(57	)		23
Comprehensive (loss) income		(69	)		2			183			(185	)		(69	)

43

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 18. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

	For the nine months ended
	September 30, 2020
							Non-
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS				Guarantor			Guarantor			Consolidating
(LOSS) AND COMPREHENSIVE INCOME (LOSS)	Parent			Subsidiaries			Subsidiaries			Adjustments			Consolidated
	$			$			$			$			$
Sales		—			2,415			1,010			(693	)		2,732
Operating expenses
Cost of sales, excluding depreciation and amortization		—			2,234			808			(693	)		2,349
Depreciation and amortization		—			125			45			—			170
Selling, general and administrative		7			19			167			—			193
Impairment of long-lived assets		—			111			—			—			111
Closure and restructuring costs		—			65			4			—			69
Other operating loss (income), net		1			3			(7	)		—			(3	)
		8			2,557			1,017			(693	)		2,889
Operating loss		(8	)		(142	)		(7	)		—			(157	)
Interest expense (income), net		49			56			(62	)		—			43
Non-service components of net periodic benefit cost		—			(5	)		(8	)		—			(13	)
(Loss) earnings before income taxes and equity loss		(57	)		(193	)		63			—			(187	)
Income tax (benefit) expense		(35	)		(47	)		22			—			(60	)
Equity method investment loss, net of taxes		—			1			1			—			2
Share in earnings of equity accounted investees		(46	)		56			—			(10	)		—
(Loss) earnings from continuing operations		(68	)		(91	)		40			(10	)		(129	)
Earnings from discontinued operations, net of taxes		—			45			16			—			61
Net (loss) earnings		(68	)		(46	)		56			(10	)		(68	)
Other comprehensive (loss) income		(16	)		(27	)		8			19			(16	)
Comprehensive (loss) income		(84	)		(73	)		64			9			(84	)

44

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 18. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

	September 30, 2021
					Non-
			Guarantor		Guarantor		Consolidating
CONDENSED CONSOLIDATING BALANCE SHEET	Parent		Subsidiaries		Subsidiaries		Adjustments			Consolidated
	$		$		$		$			$
Assets
Current assets
Cash and cash equivalents		301		4		39		—			344
Receivables		1		131		424		—			556
Inventories		—		437		207		—			644
Prepaid expenses		34		28		7		—			69
Income and other taxes receivable		64		—		13		(47	)		30
Intercompany accounts		355		529		43		(927	)		—
Total current assets		755		1,129		733		(974	)		1,643
Property, plant and equipment, net		—		1,377		657		—			2,034
Operating lease right-of-use assets		—		37		8		—			45
Intangible assets, net		—		24		5		—			29
Investments in affiliates		2,898		1,848		—		(4,746	)		—
Intercompany long-term advances		5		—		1,264		(1,269	)		—
Other assets		17		40		151		(12	)		196
Total assets		3,675		4,455		2,818		(7,001	)		3,947
Liabilities and shareholders' equity
Current liabilities
Trade and other payables		9		371		173		—			553
Intercompany accounts		322		93		512		(927	)		—
Income and other taxes payable		2		48		15		(47	)		18
Operating lease liabilities due within one year		—		15		4		—			19
Long-term debt due within one year		—		—		1		—			1
Total current liabilities		333		527		705		(974	)		591
Long-term debt		495		—		8		—			503
Operating lease liabilities		—		36		4		—			40
Intercompany long-term loans		596		673		—		(1,269	)		—
Deferred income taxes and other		6		234		97		(12	)		325
Other liabilities and deferred credits		30		87		156		—			273
Shareholders' equity		2,215		2,898		1,848		(4,746	)		2,215
Total liabilities and shareholders' equity		3,675		4,455		2,818		(7,001	)		3,947

45

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 18. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

	December 31, 2020
					Non-
			Guarantor		Guarantor		Consolidating
CONDENSED CONSOLIDATING BALANCE SHEET	Parent		Subsidiaries		Subsidiaries		Adjustments			Consolidated
	$		$		$		$			$
Assets
Current assets
Cash and cash equivalents		208		5		96		—			309
Receivables		—		65		315		—			380
Inventories		—		425		205		—			630
Prepaid expenses		8		37		5		—			50
Income and other taxes receivable		36		—		18		—			54
Intercompany accounts		759		902		433		(2,094	)		—
Assets held for sale		—		488		648		(3	)		1,133
Total current assets		1,011		1,922		1,720		(2,097	)		2,556
Property, plant and equipment, net		—		1,348		675		—			2,023
Operating lease right-of-use assets		—		48		11		—			59
Intangible assets, net		—		24		5		—			29
Investments in affiliates		3,558		2,169		—		(5,727	)		—
Intercompany long-term advances		5		—		1,157		(1,162	)		—
Other assets		11		41		143		(6	)		189
Total assets		4,585		5,552		3,711		(8,992	)		4,856
Liabilities and shareholders' equity
Current liabilities
Trade and other payables		26		294		167		(3	)		484
Intercompany accounts		677		491		926		(2,094	)		—
Income and other taxes payable		3		11		1		—			15
Operating lease liabilities due within one year		—		15		5		—			20
Long-term debt due within one year		12		—		1		—			13
Liabilities held for sale		—		121		174		—			295
Total current liabilities		718		932		1,274		(2,097	)		827
Long-term debt		1,075		—		9		—			1,084
Operating lease liabilities		—		44		6		—			50
Intercompany long-term loans		509		653		—		(1,162	)		—
Deferred income taxes and other		—		237		90		(6	)		321
Other liabilities and deferred credits		23		128		163		—			314
Shareholders' equity		2,260		3,558		2,169		(5,727	)		2,260
Total liabilities and shareholders' equity		4,585		5,552		3,711		(8,992	)		4,856

46

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 18. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

	For the nine months ended
	September 30, 2021
CONDENSED CONSOLIDATING STATEMENT OF    CASH FLOWS	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Consolidating Adjustments			Consolidated
	$			$			$			$			$
Operating activities
Net earnings		82			141			87			(228	)		82
Changes in operating and intercompany assets and    liabilities and non-cash items, included in net    earnings		(125	)		39			(55	)		228			87
Cash flows (used for) provided from operating activities		(43	)		180			32			—			169
Investing activities
Additions to property, plant and equipment		—			(153	)		(38	)		—			(191	)
Proceeds from disposals of property, plant and equipment		—			1			3			—			4
Proceeds from sale of business, net of cash disposed		—			—			897			—			897
Cash flows (used for) provided from investing activities		—			(152	)		862			—			710
Financing activities
Stock repurchase		(238	)		—			—			—			(238	)
Repayments of long-term debt, including make-whole    premium		(605	)		—			(1	)		—			(606	)
Increase in long-term advances to related parties		—			(29	)		(950	)		979			—
Decrease in long-term advances to related parties		979			—			—			(979	)		—
Cash flows provided from (used for) financing activities		136			(29	)		(951	)		—			(844	)
Net increase (decrease) in cash and cash equivalents		93			(1	)		(57	)		—			35
Cash and cash equivalents at beginning of period		208			5			96			—			309
Cash and cash equivalents at end of period		301			4			39			—			344

47

DOMTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2021

(IN MILLIONS OF DOLLARS, UNLESS OTHERWISE NOTED)

(UNAUDITED)

NOTE 18. SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION (CONTINUED)

	For the nine months ended
	September 30, 2020
CONDENSED CONSOLIDATING STATEMENT OF    CASH FLOWS	Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Consolidating Adjustments			Consolidated
	$			$			$			$			$
Operating activities
Net (loss) earnings		(68	)		(46	)		56			(10	)		(68	)
Changes in operating and intercompany assets and    liabilities and non-cash items, included in net (loss)    earnings		41			81			212			10			344
Cash flows (used for) provided from operating activities		(27	)		35			268			—			276
Investing activities
Additions to property, plant and equipment		—			(75	)		(55	)		—			(130	)
Acquisition of business, net of cash acquired		—			—			(30	)		—			(30	)
Cash flows used for investing activities		—			(75	)		(85	)		—			(160	)
Financing activities
Dividend payments		(51	)		—			—			—			(51	)
Stock repurchase		(59	)		—			—			—			(59	)
Net change in bank indebtedness		—			(10	)		—			—			(10	)
Change in revolving credit facility		(80	)		—			—			—			(80	)
Proceeds from receivables securitization facility		—			—			25			—			25
Repayments of receivables securitization facility		—			—			(80	)		—			(80	)
Issuance of long-term debt		300			—			—			—			300
Repayments of long-term debt		(3	)		—			—			—			(3	)
Increase in long-term advances to related parties		—			—			(100	)		100			—
Decrease in long-term advances to related parties		52			48			—			(100	)		—
Other		(4	)		—			1			—			(3	)
Cash flows provided from (used for) financing    activities		155			38			(154	)		—			39
Net increase (decrease) in cash and cash equivalents		128			(2	)		29			—			155
Impact of foreign exchange on cash		—			—			2			—			2
Cash and cash equivalents at beginning of period		1			11			49			—			61
Cash and cash equivalents at end of period		129			9			80			—			218

48

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with Domtar Corporation’s unaudited interim financial statements and notes thereto included in this Quarterly Report on Form 10-Q. This MD&A should also be read in conjunction with the historical financial information contained in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission (“SEC”) on March 1, 2021. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in forward-looking statements. Factors that might cause a difference include, but are not limited to, those discussed below under “outlook”, “Forward-looking statements”, as well as in Item 1A, Risk Factors, in Part II, of this report. Throughout this MD&A, unless otherwise specified, “Domtar Corporation,” “the Company,” “Domtar,” “we,” “us” and “our” refers to Domtar Corporation and its subsidiaries. Domtar Corporation’s common stock is listed on the New York Stock Exchange and the Toronto Stock Exchange. Except where otherwise indicated, all financial information reflected herein is determined on the basis of accounting principles generally accepted in the United States.

The information contained on our website, www.domtar.com, is not incorporated by reference into this Form 10-Q and should in no way be construed as a part of this or any other report that we file with or furnish to the SEC.

In accordance with industry practice, in this report, the term “ton” or the symbol “ST” refers to a short ton, an imperial unit of measurement equal to 0.9072 metric tons. The term “metric ton” or the symbol “ADMT” refers to an air dry metric ton. In this report, unless otherwise indicated, all dollar amounts are expressed in U.S. dollars, and the term “dollars” and the symbol “$” refer to U.S. dollars. In the following discussion, unless otherwise noted, references to increases or decreases in income and expense items, prices, contribution to net earnings (loss), and shipment volumes are based on the three and nine months ended September 30, 2021 and September 30, 2020. The three month and nine month periods are also referred to as the third quarter and first nine months of 2021 and 2020. Reference to notes refers to footnotes to the consolidated financial statements and notes thereto included in Item 1 in this Form 10-Q.

This MD&A is intended to provide investors with an understanding of our recent performance, financial condition and outlook. Topics discussed and analyzed include:

• Overview

• Highlights for the three month and nine month periods ended September 30, 2021

• COVID-19 Update and Outlook

• Cost Reduction Program

• Review of Continuing Operations

• Discontinued Operations of our Personal Care Business

• Liquidity and Capital Resources

Paper Excellence to Acquire Domtar Corporation

On May 10, 2021, Domtar and Paper Excellence, a global diversified manufacturer of pulp and specialty, printing, writing, and packaging papers, entered into a business combination transaction (the “Paper Excellence transaction” or “transaction”) under which the Paper Excellence group of companies will acquire all of the issued and outstanding shares of Domtar common stock for $55.50 per share, in cash. The all-cash transaction represents an enterprise value of approximately $3 billion. After the transaction closes, Paper Excellence intends to continue the operations of Domtar as a stand-alone business entity. As such, Domtar will continue to be led by its management team and Paper Excellence plans to retain its corporate and production locations. The transaction is expected to close in the fourth quarter of 2021, subject to receipt of the required regulatory approvals and other customary closing conditions. On July 29, 2021, Domtar’s shareholders approved the transaction. During the three and nine months ended September 30, 2021, we recorded $5 million and $23 million, respectively, of transaction fees under Closure and restructuring costs on the Consolidated Statement of Earnings (Loss) and Comprehensive Income (Loss).

Restart of the paper machine at our Ashdown, Arkansas mill

On July 15, 2021, we announced our intention to restart the paper machine at our Ashdown, Arkansas mill to add an additional 185,000 tons per year of uncoated freesheet production capacity to our manufacturing network. The increase is necessary to meet growing customer demand as the economy recovers from the COVID-19 pandemic. The additional paper capacity will also result in a capacity reduction of 185,000 ADMT per year of baled SBSK pulp at the mill. However, it will not impact Ashdown's fluff pulp

49

production capacity, or our commitment to serving our key hygiene customers around the world. Additionally, we have a dedicated team developing a kraft linerboard project for our Ashdown mill, and the decision to restart the paper machine will not impact our intention to produce containerboard and other packaging products at the facility. The machine is expected to resume full operation in January 2022 following a period of time to ramp up to full production. We estimate the restart will cost approximately $10 million.

Sale of Personal Care Business

On March 1, 2021, we completed the previously announced sale of our Personal Care business to American Industrial Partners for a purchase price of $920 million in cash, including elements of working capital of $130 million. We received a net amount of $897 million, which represents the selling price minus the settlements of the net indebtedness and other elements of working capital adjustments. For financial reporting purposes, our former Personal Care business is presented as a discontinued operation. For more information, refer to Item 1, Financial Statements and Supplemental Data, under Note 3, “Discontinued Operations”.

OVERVIEW

We design, manufacture, market and distribute a wide variety of fiber-based products including communication papers, specialty and packaging papers. The foundation of our business is a network of wood fiber converting assets that produce paper grade, fluff and specialty pulp. Approximately 40% of our pulp production is consumed internally to manufacture paper, with the balance sold as market pulp. We are the largest integrated marketer of uncoated freesheet paper in North America serving a variety of customers, including merchants, retail outlets, stationers, printers, publishers, converters and end-users. To learn more, visit www.domtar.com.

We operate as a single reportable segment as described below, which also represents our only operating segment.

Pulp and Paper: Consists of the design, manufacturing, marketing and distribution of communication, specialty and packaging papers, as well as softwood, hardwood and fluff pulp and high quality airlaid and ultrathin laminated cores.

Our segment measure of profit (operating income (loss) from continuing operations) is used by management to evaluate performance and make operational decisions. Management believes that this measure allows for a better understanding of cost trends, operating efficiencies, prices and volume. Business segment operating income (loss) is defined as earnings (loss) from continuing operations before income taxes and equity losses, excluding corporate items, interest expense, net, and non-service components of net periodic benefit cost. Corporate expenses are allocated to our segment with the exception of certain discretionary charges and credits, which we present under “Corporate” and do not allocate to the segment.

Conversion of our Kingsport, Tennessee mill

We plan to enter the linerboard market with the conversion of our Kingsport paper machine. Once in full operation, the mill will produce and market approximately 600,000 tons annually of high-quality recycled linerboard and medium, providing us with a strategic footprint in a growing adjacent market. The conversion is expected to be completed by the end of 2022.

We estimate the conversion cost to be approximately $350 million. Once fully operational, the mill is expected to be a low-cost, first quartile recycled linerboard facility in North America. The converted mill is expected to directly employ approximately 160 employees. For the three months and nine months ended September 30, 2021, we recorded $9 million and $22 million, respectively, under Asset Conversion Costs on the Consolidated Statement of Earnings (Loss) and Comprehensive Income (Loss).

HIGHLIGHTS FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 2021

• Operating income and net earnings increased by 163% and 180%, respectively, from the third quarter of 2020

• We reported earnings from continuing operations of $74 million compared to a loss from continuing operations of $111 million in the third quarter of 2020

• Sales increased by 15% from the third quarter of 2020. Our net average selling prices for pulp and paper as well as our pulp volumes were up when compared to the third quarter of 2020

• Recognition of closure and restructuring charges and asset conversion costs of $5 million and $9 million, respectively, related mostly to the Paper Excellence transaction and our previously announced decision to repurpose assets at our Kingsport mill

50

HIGHLIGHTS FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2021  

• Operating income and net earnings increased by 206% and 221%, respectively, from the first nine months of 2020

• We reported earnings from continuing operations of $105 million compared to a loss from continuing operations of $129 million in the first nine months of 2020

• Loss from discontinued operations, net of taxes amounted to $23 million in the first nine months of 2021, including a net loss on disposition of discontinued operations of $33 million

• Sales increased by 9% from the first nine months of 2020. Our net average selling prices for pulp and paper were up as well as our pulp volume, while our manufacturing paper volumes were down from the first nine months of 2020  

• Recognition of closure and restructuring charges and asset conversion costs of $33 million and $22 million, respectively, related mostly to the Paper Excellence transaction, our cost reduction program and our previously announced decision to repurpose assets at our Kingsport mill

• Repaid $605 million of outstanding indebtedness under our 4.4% Notes and Term Loan Agreement, including make-whole premium of $11 million and repurchased $238 million of our common stock

	Three months ended												Nine months ended
							Variance												Variance
FINANCIAL HIGHLIGHTS	September 30, 2021			September 30, 2020			$			%			September 30, 2021			September 30, 2020			$			%
(In millions of dollars, unless otherwise noted)
Sales	$	1,031		$	899		$	132			15	%	$	2,985		$	2,732		$	253			9	%
Operating income (loss)
Pulp and Paper		108			(140	)		248			177	%		215			(133	)		348			262	%
Corporate		(12	)		(12	)		—			-	%		(49	)		(24	)		(25	)		(104	%)
Operating income (loss)		96			(152	)		248			163	%		166			(157	)		323			206	%
Earnings (loss) from continuing operations		74			(111	)		185			167	%		105			(129	)		234			181	%
Earnings (loss) from discontinued operations, net of taxes		—			19			(19	)		(100	%)		(23	)		61			(84	)		(138	%)
Net earnings (loss)		74			(92	)		166			180	%		82			(68	)		150			221	%
Basic net earnings (loss) per common share (in dollars) (a):
Earnings (loss) from continuing operations	$	1.47		$	(2.01	)	$	3.48						2.04			(2.33	)	$	4.37
Earnings (loss) from discontinued operations	$	—		$	0.34		$	(0.34	)					(0.44	)		1.10		$	(1.54	)
Basic net earnings (loss)	$	1.47		$	(1.67	)	$	3.14						1.60			(1.23	)	$	2.83
Diluted net earnings (loss) per common share (in dollars) (a):
Earnings (loss) from continuing operations	$	1.46		$	(2.01	)	$	3.47						2.03			(2.33	)	$	4.36
Earnings (loss) from discontinued operations	$	—		$	0.34		$	(0.34	)					(0.44	)		1.10		$	(1.54	)
Diluted net earnings (loss)	$	1.46		$	(1.67	)	$	3.13						1.59			(1.23	)	$	2.82
																			At September 30, 2021			At December 31, 2020
Total assets																			$	3,947		$	4,856
Total long-term debt, including current portion																			$	504		$	1,097

^(a) See Note 6 “Earnings (Loss) per Common Share” of the financial statements in this Quarterly Report on Form 10-Q for more

information on the calculation of net earnings (loss) per common share.

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COVID-19 UPATE

First identified in people in late 2019, COVID-19 spread rapidly throughout the world and, in March 2020, the World Health Organization characterized COVID-19 as a pandemic. With the unprecedented and rapid spread of COVID-19 and social distancing measures implemented throughout the world due to the pandemic, this virus has had a profound impact on human health, the global economy and society in general. We are actively monitoring the impact of COVID-19 on all aspects of our business, including our employees, operations, customers, suppliers, liquidity and capital resources.

We took a variety of actions during 2020 and 2021 to help mitigate the financial impact, including a cost reduction program, reducing our capital spending, suspended our regular quarterly dividend, and proactively managing our working capital.

Our focus has been on the health and safety of our employees throughout the pandemic and we will continue to maintain the safety protocols we established. As guidance from authorities such as the U.S. Centers for Disease Control evolves, we will update our practices accordingly, as we have done throughout the pandemic.

Our operations are essential services in the jurisdictions where we operate. Certain of our paper products are used in the testing for COVID-19 as well as for personal protection medical gowns. Beginning in April 2020, we saw a significant decline in demand for our paper, largely due to work-from-home rules and the overall economic slowdown. Starting in the second quarter of 2021, there was an increase in demand for our paper as the economy continues to recover from the effects of the COVID-19 pandemic. In response to the increase in demand, on July 15, 2021, we announced the restart of the paper machine at our Ashdown, Arkansas mill, discussed above.

The Government of Canada created the Canada Emergency Wage Subsidy (“CEWS”) to provide financial support for businesses during the COVID-19 pandemic and prevent large layoffs. For the nine months ended September 30, 2021, we recognized $7 million as a reduction of costs related to this program (CDN $9 million) ($6 million in Cost of sales (CDN $7 million) and $1 million in Selling, general and administrative (CDN $2 million)).

OUTLOOK

Paper demand is expected to remain strong in the fourth quarter, but shipments are anticipated to decline slightly due to lower capacity resulting from maintenance outages. Demand for paper grade pulp is expected to soften, while demand for fluff pulp grade is expected to remain strong. We expect to continue to experience challenging supply chain conditions. Paper prices are expected to continue to increase following recently announced price increases while paper grade pulp prices should continue to decline. Overall raw material costs are expected to increase mostly due to inflation.

COST REDUCTION PROGRAM

On August 7, 2020, we announced the implementation of a cost reduction program, targeting $200 million in annual run-rate cost savings to be realized by the end of 2021. In the second quarter of 2021, we achieved and closed our cost reduction program. The goal of the program was to build a stronger business operation, enhance our cost efficiency, improve operating margins and maximize productivity and cash flow. The costs saving initiatives included capacity reduction and asset closures, mill-level cost savings and rightsizing support functions.

Our cost reduction program included the permanent closure of the uncoated freesheet manufacturing at our Kingsport, Tennessee and Port Huron, Michigan mills, the remaining paper machine at our Ashdown, Arkansas mill and the converting center in Ridgefields, Tennessee. Additionally, on May 7, 2021, we announced the closure of our converting center in Dallas, Texas. These actions reduced our annual uncoated freesheet paper capacity by approximately 721,000 short tons and resulted in a workforce reduction of approximately 750 employees. Our Kingsport and Ashdown paper machines, which have been idled since April 2020, did not recommence operations. Our Ridgefields converting center ceased operations at the end of the third quarter of 2020, our Port Huron mill ceased operations in the first quarter of 2021 and our Dallas converting center ceased operations at the beginning of July 2021.

For the three and nine months ended September 30, 2021, we recorded $1 million and $8 million, respectively, of accelerated depreciation under Impairment of long-lived assets, $1 million and $5 million, respectively, of severance and termination costs, $1 million and nil, respectively, of pension settlement gain and nil and $4 million, respectively, of other costs under Closure and restructuring costs on the Consolidated Statement of Earnings (Loss) and Comprehensive Income (Loss).

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REVIEW OF OPERATIONS

This section presents a discussion and analysis of our third quarter and first nine months of 2021 and 2020 sales, operating income (loss) and other information relevant to the understanding of our results of operations.

ANALYSIS OF NET SALES
	Three months ended								Nine months ended
					Variance								Variance
	September 30, 2021		September 30, 2020		$			%	September 30, 2021		September 30, 2020		$			%
Sales		1,031		899		132		15%		2,985		2,732		253		9%
Shipments
Paper - manufactured (in thousands of ST)		546		550		(4	)	(1%)		1,641		1,688		(47	)	(3%)
Communication Papers		449		449		—		-%		1,356		1,384		(28	)	(2%)
Specialty and Packaging papers		97		101		(4	)	(4%)		285		304		(19	)	(6%)
Paper - sourced from third parties (in thousands of ST)		20		16		4		25%		56		50		6		12%
Paper - total (in thousands of ST)		566		566		—		-%		1,697		1,738		(41	)	(2%)
Pulp (in thousands of ADMT)		438		424		14		3%		1,373		1,305		68		5%

ANALYSIS OF CHANGES IN SALES
	Third quarter of 2021 versus Third quarter of 2020									First nine months of 2021 versus First nine months of 2020
	% Change in Sales due to									% Change in Sales due to
	Net Price			Volume / Mix			Total			Net Price			Volume / Mix			Total
Sales		14	%		1	%		15	%		9	%		-	%		9	%

Sales in the third quarter of 2021 increased by $132 million, or 15% when compared to sales in the third quarter of 2020. This increase in sales is mostly due to an increase in our net average selling prices for pulp and paper and an increase in our pulp sales volume.

Sales in the first nine months of 2021 increased by $253 million, or 9% when compared to sales in the first nine months of 2020. This increase in sales is mostly due to an increase in our net average selling prices for pulp and paper and an increase in our pulp sales volumes. This increase was partially offset by a decrease in our paper sales volumes as a result of work-from-home rules and the overall economic slowdown.

ANALYSIS OF CHANGES IN OPERATING INCOME (LOSS)
Third quarter of 2021 versus Third quarter of 2020
	$ Change in Operating Income (Loss) due to
	Volume/Mix		Net Price		Input Costs (a)			Operating Expenses  (b)			Currency			Depreciation/ Impairment (c)		Restructuring/ Conversion (d)			Other Income/ Expense (e)		Total
Pulp and Paper		—		123		(11	)		(31	)		(5	)		113		57			2		248
Corporate		—		—		—			—			—			—		(3	)		3		—
Operating income (loss)		—		123		(11	)		(31	)		(5	)		113		54			5		248

(a) Includes raw materials (such as fiber and chemicals) and energy costs.

(b) Includes maintenance, freight costs, selling, general and administrative (“SG&A”) expenses and other costs.

(c) Depreciation charges were lower by $3 million in the third quarter of 2021, excluding foreign currency impact and we recorded $1 million of accelerated depreciation under Impairment of long-lived assets. In the third quarter of 2020, we recorded $111 million of accelerated depreciation under Impairment of long-lived assets related to our cost reduction program.

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(d) We recorded $5 million of restructuring charges in the third quarter of 2021 related to transaction fees for the Paper Excellence transaction, compared to $68 million in the third quarter of 2020 related to our cost reduction program. We also recorded $9 million of asset conversion costs at our Kingsport mill in the third quarter of 2021 as part of the conversion plan to a linerboard facility.

(e)Third quarter of 2021 other operating income/expense includes:	Third quarter of 2020 other operating income/expense includes:
- Net gain on sale of property, plant and equipment   ($3 million) - Foreign currency gain on working capital items   ($2 million) - Environmental provision ($1 million) - Other income ($1 million)	- Foreign currency loss on working capital items   ($1 million) - Other income ($1 million)

Commentary – Third quarter of 2021 compared to Third quarter of 2020

Operating income in our Pulp and Paper segment amounted to $108 million in the third quarter of 2021, an increase of $248 million, when compared to operating loss of $140 million in the third quarter of 2020. Our results were positively impacted by:

• Higher net average selling prices for pulp and paper ($123 million)

• Lower depreciation/impairment charges ($113 million). Depreciation charges were lower by $3 million when compared to the third quarter of 2020. We recorded $1 million of accelerated depreciation under Impairment of long-lived assets in the third quarter of 2021 compared to $111 million of accelerated depreciation charges in the third quarter of 2020 related to our cost reduction program

• Lower restructuring and conversion charges ($57 million) in the third quarter of 2021. We recorded $1 million of restructuring charges compared to $67 million of restructuring charges in the third quarter of 2020 related to our cost reduction program. We also recorded $9 million of asset conversion costs at our Kingsport mill as part of the conversion to a linerboard facility in the third quarter of 2021.

• Higher other income ($2 million)

These increases were partially offset by:

• Higher operating expenses ($31 million) mostly due to higher maintenance in part due to the timing of some major maintenance, higher freight costs and higher salaries and wages. This increase was partially offset by higher production

• Higher input costs ($11 million) mostly related to higher costs of chemicals due to unfavorable market conditions and a business acquisition in the second quarter of 2020

• Negative impact of a stronger Canadian dollar on our Canadian dollar denominated expenses, net of our hedging program ($5 million)

OTHER FACTORS

Corporate

We incurred $12 million of corporate charges in the third quarter of 2021 compared to $12 million in the third quarter of 2020. We recorded $4 million of restructuring charges in the third quarter of 2021 related mostly to transaction fees for the Paper Excellence transaction compared to $1 million of restructuring charges in the third quarter of 2020 and offset by the proceeds from the sale of property in the third quarter of 2021. SG&A expenses were flat when compared to the third quarter of 2020.

Interest Expense, net

We incurred $7 million of net interest expense in the third quarter of 2021, a decrease of $7 million compared to net interest expense of $14 million in the third quarter of 2020. This was due to lower interest on the 4.4% Notes due to the early retirement in April 2021 as well as lower interest on the Term loan due to the early repayment in the March 2021.

Income Taxes

For the third quarter of 2021, our income tax expense was $22 million, consisting of a current income tax expense of $28 million and a deferred income tax benefit of $6 million. This compares to an income tax benefit of $52 million in the third quarter of 2020, consisting of a current income tax benefit of $10 million and a deferred income tax benefit of $42 million. We made income tax payments, net of refunds, of $17 million during the third quarter of 2021. The effective tax rate was 23% compared with an effective tax rate of 32% in the third quarter of 2020. Our tax provision for interim periods is determined using an estimate of our annual effective tax rate and then adjusting for discrete items arising in that quarter. In each interim quarter we update the estimate of the annual effective tax rate and, if the estimated annual tax rate changes, we make a cumulative adjustment in that quarter. The effective

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tax rate for the third quarter of 2020 was significantly impacted by such an adjustment, mainly due to a change in the mix of earnings or loss between jurisdictions. The effective tax rate for the third quarter of 2020 was also favorably impacted by the CARES Act, which granted companies the ability to carry back tax losses generated in the U.S. in 2020 to a tax year with a higher statutory tax rate.

First nine months of 2021 versus First nine months of 2020
By Business Segment
	$ Change in Segmented Operating Income (Loss) due to
	Volume/Mix			Net Price		Input Costs (a)			Operating Expenses  (b)			Currency			Depreciation/ Impairment (c)		Restructuring/ Conversion (d)			Other Income/ Expense (e)			Total
Pulp and Paper		(15	)		259		(17	)		(25	)		(2	)		115		35			(2	)		348
Corporate		—			—		—			(8	)		(1	)		—		(21	)		5			(25	)
Operating income (loss)		(15	)		259		(17	)		(33	)		(3	)		115		14			3			323

(a) Includes raw materials (such as fiber and chemicals) and energy costs.

(b) Includes maintenance, freight costs, SG&A expenses and other costs.

(c) Depreciation charges were lower by $12 million in the first nine months of 2021, excluding foreign currency impact and we recorded $8 million of accelerated depreciation under Impairment of long-lived assets, related to our cost reduction program. In the first nine months of 2020, we recorded $111 million of accelerated depreciation under Impairment of long-lived assets related to our cost reduction program.

(d) We recorded $33 million of restructuring charges in the first nine months of 2021 consisting of $23 million of transaction fees for the Paper Excellence transaction and $5 million of severance and termination costs and $5 million of other costs mostly related to our cost reduction program, compared to $69 million of restructuring charges in the first nine months of 2020 related to our cost reduction program. We also recorded $22 million of asset conversion costs at our Kingsport mill as part of the conversion to a linerboard facility in the first nine months of 2021.

(e)     First nine months of 2021 other operating income/ expense includes:	First nine months of 2020 other operating income/ expense includes:
- Net gain on sale of property, plant and equipment ($3 million) - Bad debt recovery ($2 million) - Environmental provision ($2 million) - Other income ($3 million)	- Income from termination of non-production agreement ($7 million) - Bad debt expense ($5 million) - Environmental provision ($1 million) - Other income ($2 million)

Commentary – First nine months of 2021 compared to first nine months of 2020

Operating income in our Pulp and Paper segment amounted to $215 million in the first nine months of 2021, an increase of $348 million, when compared to operating loss of $133 million in the first nine months of 2020. Our results were positively impacted by:

• Higher net average selling prices for pulp and paper ($259 million)

• Lower depreciation/impairment charges ($115 million). Depreciation charges were lower by $12 million when compared to the first nine months of 2020. We recorded $8 million of accelerated depreciation under Impairment of long-lived assets, related to our cost reduction program in the first nine months of 2021 compared to $111 million of accelerated depreciation charges in the first nine months of 2020 related to our cost reduction program.

• Lower restructuring and conversion charges ($35 million) in the first nine months of 2021. We recorded $11 million of restructuring charges mostly related to our cost reduction program compared to $68 million of restructuring charges in the first nine months of 2020 mostly related to our cost reduction program. We also recorded $22 million of conversion costs at our Kingsport mill to a linerboard facility in the first nine months of 2021.

These increases were partially offset by:

• Higher operating expenses ($25 million) mostly related to higher freight costs as well as higher salaries and wages and partially offset by lower maintenance costs in part due to the timing of some major maintenance and lower costs due to our 2020 cost reduction program.

• Higher input costs ($17 million) mostly related to higher cost of chemicals due to a business acquisition in the second quarter of 2020 and unfavorable market conditions as well as higher energy costs mostly due to severe weather issues in the first quarter of 2021 and unfavorable market conditions

• Lower volume and mix ($15 million)

• Lower other income ($2 million)

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• Negative impact of our foreign currency hedging program partially offset by a stronger Canadian dollar on our Canadian dollar denominated expenses ($2 million)

OTHER FACTORS

Corporate

We incurred $49 million of corporate charges in the first nine months of 2021, an increase of $25 million compared to corporate charges of $24 million in the first nine months of 2020. This increase was mostly due to transaction fees incurred for the Paper Excellence transaction. SG&A expenses were higher in the first nine months of 2021 mostly due to higher variable compensation when compared to the first nine months of 2020. These increases were partially offset by the proceeds from the sale of property in the third quarter of 2021.

Interest Expense, net

We incurred $42 million of net interest expense in the first nine months of 2021, a decrease of $1 million compared to net interest expense of $43 million in the first nine months of 2020 as a results of lower interest on the 4.4% Notes and Term loan mostly due to their early retirements. This was partially offset by the $11 million in make-whole premium fees we paid in relation to the early retirement of the 4.4% Notes originally due March 2022.

Income Taxes

For the first nine months of 2021, our income tax expense was $38 million, consisting of a current income tax expense of $43 million and a deferred income tax benefit of $5 million. This compares to an income tax benefit of $60 million in the first nine months of 2020, consisting of a current income tax benefit of $15 million and a deferred income tax benefit of $45 million. We made income tax payments, net of refunds, of $18 million during the first nine months of 2021. The effective tax rate was 27% compared to an effective tax rate of 32% in the first nine months of 2020. The effective tax rate for the first nine months of 2021 was significantly impacted by certain transaction costs incurred during the period related to our potential acquisition by Paper Excellence which provide no tax benefit. The effective tax rate for the first nine months of 2020 was significantly impacted by the mix of earnings or loss in our major jurisdictions, by the recognition of additional tax credits in various jurisdictions, and by our ability to carry back U.S. tax losses generated in 2020 to a tax year with a higher statutory tax rate. These favorable impacts were partially offset by an increase in the valuation allowance related to the expected realization of certain U.S. state tax credits.

Economic conditions and uncertainties

The markets in which our pulp and paper business operate are highly competitive with well-established domestic and foreign manufacturers. Most of our products are commodities that are widely available from other producers as well. Because commodity products have few distinguishing qualities from producer to producer, competition for these products is based primarily on price, which is determined by supply relative to demand. We also compete on the basis of product quality, breadth of offering and service solutions. Further, we compete against electronic transmission and document storage alternatives. As a result of such competition, we are experiencing ongoing decreasing demand for most of our existing paper products. In addition, current global economic conditions are highly volatile due to the COVID-19 pandemic, resulting in both market size contractions in certain countries due to economic slowdowns and government restrictions on movement.

The pulp market is highly fragmented with many manufacturers competing worldwide. Competition is primarily on the basis of access to low-cost wood fiber, product quality and pricing of other pulp products.

The high degree of uncertainty and volatility day-to-day and the longer-term potential impacts of the economic slowdown remain unclear. Paper demand is expected to remain strong in the fourth quarter, but shipments are anticipated to decline slightly due to lower capacity resulting from maintenance outages. Demand for paper grade pulp is expected to soften, while demand for fluff pulp grade is expected to remain strong. We expect to continue to experience challenging supply chain conditions. Paper prices are expected to continue to increase following recently announced price increases while paper grade pulp prices should continue to decline. Overall raw material costs are expected to increase mostly due to inflation.

DISCONTINUED OPERATION

On March 1, 2021, we completed the sale of our Personal Care business. Its results of operations are reported as discontinued operations for all periods presented. For the first nine months of 2021, we reported a loss from discontinued operations, net of taxes, of $23 million (first nine months of 2020 – earnings from discontinued operations, net of taxes of $61 million). For more information, refer to Item 1, Financial Statements and Supplemental Data, under Note 3, “Discontinued Operations”.

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 STOCK-BASED COMPENSATION EXPENSE

For the first nine months of 2021, stock-based compensation expense recognized in our results from continuing and discontinued operations was $10 million for all outstanding awards which includes a mark-to-market recovery, net of hedging, related to liability awards of nil. This compares to a stock-based compensation expense of $4 million from continuing and discontinued operations for all outstanding awards which includes a mark-to-market recovery, net of hedging, related to liability awards of $9 million in the first nine months of 2020. Compensation costs for performance awards are based on management’s best estimate of the final performance measurement.

LIQUIDITY AND CAPITAL RESOURCES

Our principal cash requirements are for ongoing operating costs, pension contributions, working capital and capital expenditures, as well as principal and interest payments on our debt and income tax payments. We expect to fund our liquidity needs primarily with internally generated funds from our operations and, to the extent necessary, through borrowings under our $700 million credit facility, of which $672 million is currently undrawn and available, or through our $150 million receivables securitization facility, of which $122 million is currently undrawn and available. Under adverse market conditions, there can be no assurance that these agreements would be available or sufficient. See “Capital Resources” below.

Our ability to make payments on the requirements mentioned above will depend on our ability to generate cash in the future, which is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Our credit and receivable securitization facilities and debt indentures impose various restrictions and covenants on us that could limit our ability to respond to market conditions, to provide for unanticipated capital investments or to take advantage of business opportunities.

A portion of our cash is held outside the U.S. by foreign subsidiaries. The earnings of the foreign subsidiaries reflect full provision for local income taxes. We remain indefinitely reinvested in the outside basis differences of our foreign subsidiaries.  

Operating Activities

Our operating cash flow requirements are primarily for salaries and benefits, the purchase of raw materials, including fiber and energy, and other expenses such as income tax and property taxes.

Cash flows from operating activities, including discontinued operations, totaled $169 million in the first nine months of 2021, a $107 million decrease compared to cash flows from operating activities of $276 million in the first nine months of 2020. This decrease in cash flows from operating activities is primarily due to an increase in working capital requirements partially offset by an increase in profitability. We made income tax payments, net of refunds, of $18 million during the first nine months of 2021 compared to income tax refunds, net of payments, of $25 million in the first nine months of 2020.

Investing Activities

Cash flows provided from investing activities, including discontinued operations in the first nine months of 2021 amounted to $710 million, a $870 million increase compared to cash flows used for investing activities of $160 million in the first nine months of 2020.

The source of cash provided from investing activities in the first nine months of 2021 was attributable to the proceeds from the sale of our Personal Care business ($897 million) and proceeds from sale of property of $4 million and was partially offset by additions to property, plant and equipment of $191 million.

The use of cash in the first nine months of 2020 was attributable to additions to property, plant and equipment of $130 million and the acquisition of the Appvion Point of Sale Business in the second quarter of 2020 ($30 million).

Our annual capital expenditures for 2021 should increase mostly due to our Kingsport mill conversion and are expected to be between $310 million and $330 million.

Financing Activities

Cash flows used for financing activities, including discontinued operations, totaled $844 million in the first nine months of 2021 compared to cash flows provided from financing activities of $39 million in the first nine months of 2020.

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The use of cash flows for financing activities in the first nine months of 2021, was mostly due from the early repayment of the Term Loan and 4.4% Notes, including the make-whole premium ($605 million) as well as for the repurchase of our common stock ($238 million) of which a $215 million payment was made under the ASR agreement.

The primary source of cash flows provided from financing activities was from proceeds of the Term Loan in the first nine months of 2020 ($300 million). This was partially offset by the decrease in borrowings under our credit facilities (revolver and receivables securitization) ($135 million), the repurchase of our common stock ($59 million), dividend payments ($51 million) and a decrease in bank indebtedness ($10 million).

Capital Resources

Net indebtedness, consisting of bank indebtedness and long-term debt, net of cash and cash equivalents, was $160 million as of September 30, 2021 compared to $788 million as of December 31, 2020. 

Use of proceeds from the sale of our Personal Care business

On April 8, 2021, we redeemed the 4.4% Notes, originally due in March 2022, at a redemption price of 100% of the principal amount of $300 million, plus accrued and unpaid interest, as well as a make-whole premium of $11 million. The debt extinguishment as well as the related loss on debt extinguishment was recognized in the second quarter of 2021.

On March 11, 2021, we repaid $294 million remaining under our Term Loan Agreement that had an original maturity in May 2025. A write-off of $2 million of unamortized debt issuance costs is included in the Interest Expense line item on the Consolidated Statement of Earnings.

Revolving Credit Facility

We have an unsecured $700 million revolving credit facility (the “Credit Agreement”) with certain domestic and foreign banks that matures on August 22, 2023.

Borrowings by the Company under the Credit Agreement are guaranteed by our significant domestic subsidiaries. Borrowings by certain foreign subsidiaries under the Credit Agreement are guaranteed by the Company, our significant domestic subsidiaries and certain of our significant foreign subsidiaries.

Borrowings under the Credit Agreement bear interest at LIBOR, EURIBOR, Canadian bankers' acceptance or prime rate, as applicable, plus a margin linked to our credit rating. In addition, we pay facility fees quarterly at rates dependent on our credit ratings. The Financial Conduct Authority in the United Kingdom plans to phase out LIBOR by the end of 2021. We do not anticipate a significant impact to our financial position from the planned phase out of LIBOR.

The Credit Agreement contains customary covenants and events of default for transactions of this type, including two financial covenants: (i) an interest coverage ratio, as defined in the Credit Agreement, that must be maintained at a level of not less than 3 to 1 and (ii) a leverage ratio, as defined in the Credit Agreement, that must be maintained at a level of not greater than 3.75 to 1 (or 4.00 to 1 upon the occurrence of certain qualifying material acquisitions). At September 30, 2021 and September 30, 2020, we were in compliance with these financial covenants, and had no borrowings under the Credit Agreement (September 30, 2020 – nil). At September 30, 2021 and September 30, 2020, we had $28 million and $51 million, respectively, of outstanding letters of credit, leaving $672 million unused and available under this facility (September 30, 2020 – $649 million).

This agreement will terminate upon completion of the Paper Excellence transaction, to be replaced by other financing arrangements.

 Receivables Securitization

Our $150 million receivables securitization facility was terminated in October 2021 ahead of its’ scheduled maturity date of November 12, 2021. 

At September 30, 2021, we had no borrowings under the receivables securitization facility and $27 million of outstanding letters of credit under the program (September 30, 2020 – nil and nil, respectively). Upon termination, the letters of credit outstanding under the program were transferred to the Credit Agreement.

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Common Stock

On May 5, 2020, due to the unprecedented market conditions caused by COVID-19, we suspended the payment of our regular quarterly dividend and stock repurchase program in order to preserve cash and provide additional flexibility in the current environment.

On February 11, 2021, we announced that we resumed our stock repurchase program. Our Board of Directors will continue to evaluate our capital return program based upon customary considerations, including market conditions.

On March 2, 2021, we entered into an ASR agreement under which we paid an aggregate of $200 million and received an aggregate initial share delivery of 4,430,906 shares of our common stock, which were immediately retired. The transaction was completed in September 2021, at which time we paid an additional $15 million to JPMorgan Chase Bank N.A. to settle the agreement. For more information, refer to item 1, Financial Statements and Supplemental Data, under Note 15, “Shareholders’ Equity”.

Due to the Paper Excellence transaction, we have discontinued further share repurchases.

During 2020, we declared one quarterly dividend of $0.455 per share, to holders of our common stock. Total dividends aggregating $25 million were paid on April 15, 2020 to shareholders of record as of April 2, 2020.  

GUARANTEES

Indemnifications

In the normal course of business, we offer indemnifications relating to the sale of our businesses and real estate. In general, these indemnifications may relate to claims from past business operations, compliance with laws, the failure to abide by covenants and the breach of representations and warranties included in sales agreements. Typically, such representations and warranties relate to taxation, environmental, product and employee matters. The terms of these indemnification agreements are generally for an unlimited period of time. At September 30, 2021, we were unable to estimate the potential maximum liabilities for these types of indemnification guarantees as the amounts are contingent upon the outcome of future events, the nature and likelihood of which cannot be reasonably estimated at this time. Accordingly, no provision has been recorded. These indemnifications have not yielded significant expenses in the past.

Pension Plans

We have indemnified and held harmless the trustees of our pension funds, and the respective officers, directors, employees and agents of such trustees, from any and all costs and expenses arising out of the performance of their obligations under the relevant trust agreements, including in respect of their reliance on authorized instructions from us or for failing to act in the absence of authorized instructions. These indemnifications survive the termination of such agreements. At September 30, 2021, we have not recorded a liability associated with these indemnifications, as we do not expect to make any payments pertaining to these indemnifications.  

RECENT ACCOUNTING PRONOUNCEMENTS

Refer to Note 2 “Recent Accounting Pronouncements,” of the financial statements in this Quarterly Report on Form 10-Q.

CRITICAL ACCOUNTING ESTIMATES AND POLICIES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates, assumptions and choices amongst acceptable accounting methods that affect our reported results of operations and financial position. Critical accounting estimates pertain to matters that contain a significant level of management estimates about future events, encompass the most complex and subjective judgments and are subject to a fair degree of measurement uncertainty. On an ongoing basis, management reviews its estimates, including those related to environmental matters and asset retirement obligations, impairment and useful lives of long-lived assets, closure and restructuring costs, intangible assets impairment, pension and other post-retirement benefit plans, income taxes and contingencies related to legal claims. These critical accounting estimates and policies have been reviewed with the Audit Committee of our Board of Directors. We believe these accounting policies, and others, should be reviewed as they are essential to understanding our results of operations, cash flows and financial condition. Actual results could differ from those estimates.

For more details on critical accounting policies, refer to our Annual Report on Form 10-K for the year ended December 31, 2020.

There has not been any material change to our policies since December 31, 2020. For more details, refer to Note 2 “Recent Accounting Pronouncements” of the financial statements in this Quarterly Report on Form 10-Q.    

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FORWARD-LOOKING STATEMENTS

The information included in this Quarterly Report on Form 10-Q contains forward-looking statements relating to trends in, or representing management’s beliefs about, Domtar Corporation’s future growth, results of operations, performance, liquidity and business prospects and opportunities. These forward-looking statements are generally denoted by the use of words such as “anticipate”, “believe”, “expect”, “intend”, “aim”, “target”, “plan”, “continue”, “estimate”, “project”, “may”, “will”, “should” and similar expressions. These statements reflect management’s current beliefs and are based on information currently available to management. Forward-looking statements are necessarily based upon a number of estimates and assumptions that, while considered reasonable by management, are inherently subject to known and unknown risks and uncertainties and other factors that could cause actual results to differ materially from historical results or those anticipated. Accordingly, no assurances can be given that any of the events anticipated by the forward-looking statements will occur, or if any occur, what effect they will have on our results of operations or financial condition. These factors include, but are not limited to:

• continued decline in usage of fine paper products in our core North American market;

• our ability to implement our business diversification initiatives, including repurposing of assets and strategic acquisitions or divestitures, including facility closures;

• conversion costs in excess of our expectations and demand for linerboard;

• product selling prices;

• raw material prices, including wood fiber, chemical and energy;

• conditions in the global capital and credit markets, and the general economy, particularly in the U.S., and Canada;

• performance of our manufacturing operations, including unexpected maintenance requirements;

• the level of competition from domestic and foreign producers;

• cyberattacks or other security breaches;

• the effect of, or change in, forestry, land use, environmental and other governmental regulations and accounting regulations;

• the effect of weather and the risk of loss from fires, floods, windstorms, hurricanes and other natural disasters;

• transportation costs;

• the loss of current customers or the inability to obtain new customers;

• legal proceedings;

• changes in asset valuations, including impairment of long-lived assets, inventory, accounts receivable or other assets or other reasons;

• changes in currency exchange rates, particularly the relative value of the U.S. dollar to the Canadian dollar;

• the effect of timing of retirements and changes in the market price of Domtar Corporation’s common stock on charges for stock-based compensation;

• performance of pension fund investments and related derivatives, if any;

• a material disruption in our supply chain, manufacturing, distribution operations or customer demand such as public health crises that impact trade or the general economy, including COVID-19 and other viruses, diseases or illnesses; and

• the other factors described under “Risk Factors”, in item 1A of our Annual Report on Form 10-K, for the year ended December 31, 2020.

You are cautioned not to unduly rely on such forward-looking statements, which speak only as of the date made, when evaluating the information presented in this Quarterly Report on Form 10-Q. Unless specifically required by law, Domtar Corporation disclaims any obligation to update or revise these forward-looking statements to reflect new events or circumstances.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Information relating to quantitative and qualitative disclosure about market risk is contained in our Annual Report on Form 10-K for the year ended December 31, 2020. There has not been any material change in our exposure to market risk since December 31, 2020. A full discussion on Quantitative and Qualitative Disclosure about Market Risk, is found in Note 5 “Derivatives and Hedging Activities and Fair Value Measurement,” of the financial statements in this Quarterly Report on Form 10-Q.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports under the Securities and Exchange Act of 1934, as amended (“Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. As of September 30, 2021, an evaluation was performed by members of management, at the direction and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Exchange Act). Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2021, our disclosure controls and procedures were effective.

Change in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting during the period covered by this report.

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Note 16 “Commitments and Contingencies” of the financial statements in this Quarterly Report on Form 10-Q for the discussion regarding legal proceedings.

For a description of previously reported legal proceedings refer to Part I, Item 3, “Legal Proceedings,” of our Annual Report on Form 10-K for the year ended December 31, 2020.

ITEM 1A. RISK FACTORS

Our Annual Report on Form 10-K for the year ended December 31, 2020, contains important risk factors that could cause our actual results to differ materially from those projected in any forward-looking statement. Except as stated below, there were no material changes to the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2020.

The proposed business combination transaction of the Company with Paper Excellence (the “Paper Excellence transaction” or “transaction”), is subject to certain closing conditions that, if not satisfied or waived, will result in the transaction not being completed, which may cause the market price of the Company’s common stock to decline.

The Paper Excellence transaction is subject to customary conditions to closing, including the receipt of required regulatory approvals and other customary closing conditions. If any condition to the transaction is not satisfied or, if permissible, waived, the transaction will not be completed. In addition, Paper Excellence and the Company may terminate the transaction in certain circumstances. If Paper Excellence and the Company do not complete the transaction, the market price of the Company’s Common Stock may fluctuate to the extent that the current market prices of those shares reflect a market assumption that the transaction will be completed. The Company will also be obligated to pay certain fees and expenses in connection with the transaction, whether or not the transaction is completed. In addition, the Company has diverted significant management resources in an effort to complete the transaction and is subject to restrictions contained in the agreement on the conduct of its business. If the transaction is not completed, the Company will have incurred significant costs, including the diversion of management resources, for which it will have received little or no benefit. Further, in specified circumstances, the Company may be required to pay Paper Excellence a company termination fee of up to $83 million if the transaction is terminated.

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Whether or not the Paper Excellence transaction is completed, the announcement and pendency of the transaction could cause disruptions in the businesses of the Company, which could have an adverse effect on our business and financial results.

Whether or not the Paper Excellence transaction is completed, the announcement and pendency of the transaction could cause disruptions in the businesses of the Company. Specifically:

× the announcement of the transaction could have an adverse effect on the ability of the Company to retain and hire key personnel and maintain relationships with customers, suppliers and others with whom the Company does business;

× the announcement of the transaction could have an adverse effect on the Company’s operating results and business in general;

× the transaction could disrupt current plans and operations of the Company and could result in potential difficulties in employee retention as a result of the transaction; and

× the outcome of any legal proceedings related to the transaction could have an adverse effect on the business and financial results of the Company.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the third quarter of 2021, we did not repurchase any shares under our share repurchase program (the “Program”).  As of September 30, 2021, we have $106 million of remaining availability under our Program.

The Program may be suspended, modified or discontinued at any time and we have no obligation to repurchase any amount of our common stock under the Program. The Program has no set expiration date. We repurchase our common stock in part to reduce the dilutive effects of our stock options and awards and to improve shareholders’ returns. The timing and amount of stock repurchases will depend on a variety of factors, including market conditions, availability under the program as well as corporate and regulatory considerations. All shares repurchased are recorded as Treasury stock on the Consolidated Balance Sheets under the par value method at $0.01 per share.

Due to the Paper Excellence transaction, we have discontinued our share repurchase program.

In March 2021, we entered into an ASR agreement under which we paid an aggregate of $200 million and received an aggregate initial share delivery of 4,430,906 shares of our common stock, which were immediately retired. The transaction was completed in September 2021, at which time we paid an additional $15 million to JPMorgan Chase Bank N.A. to settle the agreement. For more information, refer to Item 1, Financial Statements and Supplemental Data, under Note 15, “Shareholders’ Equity”.

During the first nine months of 2021, we repurchased 5,060,865 shares at an average price of $46.96 for a total cost of $238 million.

During the first nine months of 2020, we repurchased 1,798,306 shares at an average price of $33.05 for a total cost of $59 million.

ITEM 3. DEFAULT UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

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ITEM 6. EXHIBITS

    Incorporated  by reference to:

Exhibit Number	Exhibit Description	Form	Exhibit	Filing Date
31.1	Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH	Inline XBRL Taxonomy Extension Schema
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase

101.PRE	Inline XBRL Extension Presentation Linkbase
104	Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized.

DOMTAR CORPORATION
Date: November 4, 2021
By:	/s/ Daniel Buron
	Daniel Buron
	Executive Vice-President and Chief Financial Officer
By:	/s/ Josée Mireault
	Josée Mireault
	Director, Corporate Law and Assistant Secretary

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